Revise and Resubmit at Review of Economic Studies
I develop a general equilibrium theory of bank lending relationships in an economy subject to search frictions and limited enforceability. The model features a dynamic contracting problem embedded within a directed search equilibrium with aggregate and bank-specific uncertainty. The interaction between search and agency frictions generates a slow accumulation of lending relationship capital and distorts the optimal allocation of credit along both intensive and extensive margins. A crisis characterized by a sizable destruction of lending relationships therefore leads to a significant contraction in credit and a slow recovery, consistent with the Great Recession. I calibrate the model to study aggregate and cross-sectional implications and analyze policies aimed at reviving bank lending.
Best Paper Award in Honor of Prof. Greenbaum, Washington University in St. Louis, 2014
2. The Flow Approach to Credit Markets: Methodology, Measurements, and Macro Perspectives - with Clement Mazet-Sonilhac
We provide empirical foundations for a flow approach to credit markets and derive novel extensive/intensive margin decompositions for aggregate credit dynamics. Using bank-firm level data for commercial lending in France, we establish that the creation and destruction of credit relationship flows are (i) one order of magnitude larger than net flows, and (ii) volatile and pervasive throughout the cycle. Banks actively adjust their loan portfolios along the extensive margin, which (iii) contributes up to 46% of the cyclical and 90% of the long-run credit variations. We also document the distinct features of the extensive and intensive margin channels of monetary policy.
Previously titled ``Aggregate Implications of Credit Relationship Flows: A Tale of Two Margins".
Presentations at the 2020 UNC Junior Conference, 2020 Econometric Society World Congress, Banque de France, UNC Chapel Hill, Michigan State University, 2021 American Economic Association Meetings, 2021 Society of Economic Dynamics, 2021 Money Macro and Finance Society meeting, 2022 NBER SI Capital Markets & The Economy, University of Minnesota Junior Finance Conference
We build a financial intermediation model wherein bank and fintech intermediaries compete or partner within frictional credit markets. Banks and fintech differ in their enforcement technology and funding cost. Fintech lenders can directly extract a fraction of borrowers' output upon default, while banks rely on collateralized lending. The model explains the emergence and coexistence of three forms of lending associated with: (i) standalone banks, (ii) standalone fintechs, and (iii) bank-fintech partnerships. Fintech disruption enhances market competition and facilitates credit intermediation to previously underserved borrowers, but crowds out bank-captive borrowers as traditional banks experience low profitability and get displaced. In equilibrium, fintech entry and the prevalence of bank-fintech partnerships do not necessarily benefit all borrowers, leading to ambiguous credit and welfare effects at the aggregate level.
Presentations at the Fixed Income and Financial Institutions Conference, OCC Symposium on the Implications of Financial Technology for Banking, HEC Paris Banking in the Age of Challenges Conference, 2023 American Finance Association Meetings, 2023 HEC-McGill Winter Finance Workshop*, Arison School of Business Conference in Financial Economics*
4. Credit Market Fluidity - with Clement Mazet-Sonilhac
We coin the term credit market fluidity to describe the intensity of credit reallocation, whose properties and implications we study within the commercial loan market in France over the period 1998 through 2018. We base our analysis on credit register data and thus provide a more complete account of gross credit flows across and within bank loan portfolios. We establish new stylized facts. Banks exhibit significant heterogeneity with respect to their reallocation rates. Idiosyncratic factors account for a large share of the level and variation of credit reallocation. Credit market fluidity is procyclical overall, yet the cross-bank reallocation component is mildly countercyclical. We also document that credit market fluidity is negatively correlated with credit growth and associate its secular decline in recent decades with a credit volume gap amounting to up to EUR 100 billion.
Swiss Winter Conference on Financial Intermediation*
5. Understanding the Behavior of Distressed Stocks - with Joao Gomes and Colin Ward
We construct an asset pricing model with explicit default to develop a risk-based source of the distress anomaly. Distress produces sharply countercyclical betas leading to biased estimates of risk premia and alphas. This is amplified when earnings growth is mean-reverting, so that distressed stocks also have high expected future earnings. The bias is sizable in a calibrated economy that replicates key characteristics of these stocks. We derive an approximate correction for the bias that can be readily applied in practice. Evidence of distressed stocks' underperformance becomes much weaker after this correction, and pricing appears consistent with the CAPM.
6. In Search of Liquidity Risk in Bank Stock Returns - with Anna Cororaton
We document that higher measures of liquidity risk on banks balance sheets are associated with lower expected stock returns. We first calculate a measure of liquidity risk, referred to as the liquidity gap (LG), which reflects how much of a bank’s volatile liabilities are covered by its stock of liquid assets. We show that the standard factor models – even when augmented with bond risk, market liquidity, and financial-size factors – do not fully explain the cross section of bank stock returns sorted according to this measure. A portfolio that is long in low liquidity risk banks and short in high liquidity risk banks delivers a statistically significant α of 6 percent annually. This effect is not driven by bank characteristics such as size, profitability, or risk measures related to leverage or asset quality, but appears to be partly connected to the degree of complexity of banking organizations and potential valuation errors.
Presented at INSEAD, North Carolina State University, University of North Carolina, Wharton, the 2017 North American Summer Meeting of the Econometric Society, the 10th Swiss Winter Conference on Financial Intermediation, and the 2018 Conference on New Frontiers in Banking Research.
*: upcoming presentations
Work in progress
Bank Industry Dynamics in Frictional Credit Markets
This paper develops a dynamic credit search model where .financial intermediaries are heterogeneous with respect to funding cost and size. The framework endogenizes the degree of competition in credit markets, which is driven by search costs associated with credit origination, and bank entry costs. The calibrated model can account for several empirical facts related to bank entry and exit, credit flows, and loan markups. It is then used to investigate how major developments related to technological progress, .financial innovation, and branching deregulations have re-shaped the U.S. banking industry and impacted market competition, credit supply, bank size distribution, and net interest margins.
Financial Technology and Labor in Credit Intermediation - with Paul Yoo
We develop a theory centered around the role of .financial technology and loan officers in credit intermediation. Within a general equilibrium setting, we study how imperfections stemming from either credit or labor markets can shape bank lending decisions and contractual terms, and eventually spill over to real economic activity. Our main contribution resides in (i) designing a double-layered search model for both labor and credit, (ii) exploring how .financial technology interacts with the employment of loan officers, bank monitoring, and aggregate lending, and (iii) analyzing its welfare implications.
Credit Constraints, Firm Leverage, and Unemployment Dynamics - with Tzuo-Hann Law
We examine the interaction between credit frictions, investment and unemployment dynamics in an economy with heterogeneous firms, endogenous capital, debt, and employment decisions and a frictional labor market. The introduction of credit constraints provides a novel mechanism generating amplification and persistence in aggregate unemployment following financial crises. In the cross-section, we show that firm's labor adjustment decisions are highly dependent on their reliance on credit and financial distress. Young firms are particularly impacted through the feedback effect between labor and financing. Credit shocks not only directly tighten their budget constraint, but also increase their likelihood to exit the economy. In response, wage premia required as compensation for heightened unemployment risk also rise and further constrain firms' ability to retain or hire workers. We eventually calibrate the model to quantify the effects of financial leverage and unemployment benefit policies on labor market in the aftermath of the Great Recession.