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Job market candidate
Tel. +34 93 542 2699
Available for Interviews at
Simposio de la Asociación Española de Economía (SAEe), December 14-16, Barcelona, Spain
Allied Social Science Associations (ASSA), January 5-7, Philadelphia, US
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Banking, Corporate Finance, Corporate Governance.
"A Model of Bank Credit Cycles", with Tong Xu (Job Market Paper)
This paper develops a model of financial intermediation in which the dynamic interaction between regulator supervision and banks’ loophole innovation generates credit cycles. In the model, banks' leverages are constrained due to a risk-shifting problem. The regulator supervises the banks to ease this moral hazard problem, and its expertise in supervision improves gradually through learning-by-doing. At the same time, banks can engage in loophole innovation to circumvent supervision, which acts as an endogenous opposing force diminishing the value of the regulator's accumulated expertise. In equilibrium, banks' leverage and loophole innovation move together with the regulator's supervision ability. Our model generates pro-cyclical bank leverage and asymmetric credit cycles. We show that a crisis is more likely to occur and the consequences are more severe after a longer boom. In addition, we investigate the welfare implications of a maximum leverage ratio in the environment of loophole innovation.
“Asset Encumbrance and Bank Risk: Theory and First Evidence From Pillar III Disclosures in Europe”, with Albert Banal-Estañol, Enrique Benito and Dmitry Kametshin
Asset encumbrance refers to the existence of bank balance sheet assets being subject to arrangements that restrict the bank’s ability to freely transfer or realise them. Asset encumbrance has been a much discussed subject in recent times and policy makers have been actively addressing what some consider excessive levels of asset encumbrance. Despite its importance, the phenomenon of asset encumbrance remains poorly understood. In this paper, we develop a model of bank asset encumbrance, and derive testable implications of the model. Contrary to the conventional wisdom, we find that asset encumbrance may reduce banks’ liquidity risk in normal circumstances. However, in crisis episodes, asset encumbrance may indeed increase banks’ liquidity risk. We build a novel dataset of asset encumbrance metrics based on information provided in the banks’ Pillar III disclosures for the very first time throughout 2015. Our empirical results point to the existence of an association between risk premium and asset encumbrance that is negative, not positive. Still, certain bank characteristics such as the leverage ratio or the amount of exposures to the central bank relative to total assets play a mediating role in this association. The empirical results are well consistent with the predictions of our model.
“Managerial Career Concerns, Project Choice and Board Expertise"
This paper studies the optimal level of board expertise in a model with managerial career concerns. The manager of a firm chooses between undertaking a risky project or maintaining the status quo. Reputation concerns lead the manager to take on excessively risky projects even if this is against the shareholder’s interest. The board can evaluate the risky project, and cancel it if unfavorable interim news is received. A key result is that firm value is not necessarily enhanced when board expertise in evaluating risky projects improves. On the one hand, with greater expertise, the board is more likely to cancel a bad risky project. On the other hand, board expertise may also exacerbate a manager's career concern problem by over-protecting the manager from the pecuniary losses of risky projects. Our results are consistent with the empirical literature that documents ambiguous effect of board expertise on firm value.
“Loan sales and Bank Moral Hazard”.
This paper re-examines the classical issue of loan sales and banks’ moral hazard by highlighting the role of banks’ bankruptcy risk. In the model, banks finance their loan portfolios by issuing risky debt. Due to limited liability, banks are subject to a risk-shifting problem which leads to the under-provision of screening effort. Banks may sell loans to transfer non-diversifiable credit risk. On the one hand, loan sales reduce banks’ skin in the game, thus diluting their screening incentives. On the other hand, loan sales lower banks’ bankruptcy risk, alleviating the risk-shifting problem. The sign and the magnitude of the effect of loan sales on banks’ moral hazard depend crucially on the relative weights of these two opposing effects. When a bank’s bankruptcy risk is high, the positive risk-shifting reduction effect of loan sales dominates the negative incentive-dilution effect, thus loan sales might curb rather than exacerbate the bank’s moral hazard problem. The results extend to the case in which there is strategic adverse selection of loan sales. We study various extensions of the model.
Research in Progress
"The Rise and Fall of Shadow Banking” (with Tong Xu)
We build a macro-finance model to explain the endogenous rise and fall of the shadow banking sector. In normal times, market discipline on the shadow banks improves because investors accumulate expertise through learning, which leads to an expansion of the shadow banking sector. However, the high leverage associated with better market discipline provides greater incentives for the shadow banks to conduct loophole innovation, which generates systemic risks and leads to the collapse of the shadow banking sector. Our model captures the pro-cyclical size of the shadow banking sector, deteriorating loan quality in boom periods, higher probability of crises after longer booms, and slow recovery following a crises.