University of Luxembourg
6 Rue Richard Coudenhove-Kalergi
Phone: +352 466 644 5424
Banking, financial intermediation, liquidity risk, systemic risk, regulation, monetary policy
Stressed Banks (with Roberto Steri), May 2017, revised April 2019.
Abstract: We investigate the risk taking incentives of "stressed banks" - the banks that are subject to annual regulatory stress tests in the U.S. since 2011. We document that stress tests effectively prevent excessive risk taking by bringing additional scrutiny on risk management and capital planning processes of stressed banks. Higher capital requirements (regulation) are not a substitute for scrutiny (supervision) to promote prudent lending. However, the correction in regulatory capital charges originating from stress tests effectively reduces risky lending. Overall, our results highlight the importance of enhanced supervision of banks in parallel to setting more stringent capital requirements.
Presentations: Luxembourg School of Finance, McGill University, Danmarks Nationalbank, BI Norwegian Business School, European Central Bank, Vienna Graduate School of Finance, Norges Bank, FINMA, IESE, Erasmus School of Economics, Bank of England, VU Amsterdam, Deutsche Bundesbank, Federal Reserve Board, Swiss National Bank, CRM Montreal Systemic Risk workshop, ELTE Budapest workshop on Stress Testing and Capital Requirements, 2017 Santiago Finance workshop, 11th Swiss Winter Conference on Financial Intermediation, 2018 Lausanne-Cambridge workshop, 5th Empirical Financial Intermediation Research Network, FEBS 2018, 35th Annual Conference of the French Finance Association, 4th IWH-FIN-FIRE Workshop on "Challenges for Financial Stability", 1st Endless Summer Conference on Financial Intermediation and Corporate Finance, 2018 Federal Reserve Stress Testing Research Conference, CEPR Systemic Risk and Macroprudential Policy conference of the Bank of Israel, Showcasing Women in Finance - EU, 10th European Banking Center Network, Marstrand Finance Conference, WFA, European System of Central Banks' Day‐Ahead Conference, AEA*
Similar Investors (with Co-Pierre Georg and Sascha Steffen), September 2018.
Abstract: We study the effect of portfolio similarity among investors on their decision to roll over funding to a security issuer. Using detailed security level holdings of U.S. Money Market Mutual Funds (MMFs), we construct a novel measure of portfolio similarity among institutional investors (i.e. MMFs) who are exposed to the same security issuer. Consistent with correlated liquidity needs of more similar investors, the similarity of a fund to other investors in a security issuer increases joint liquidation costs for the security. Among funds investing in the same issuer at the same time, we find that the funds reducing their exposure to the issuer are the most similar funds. At the issuer level, the average similarity of the funds investing in an issuer predicts the issuer's total funding flows in the next period. In other words, issuers cannot substitute this loss in funds from similar investors, particularly during crises, and are thus exposed to greater funding liquidity risk.
Presentations: Norwegian School of Economics, CEBRA, BoE-CEPR-Imperial-LSE Conference on Non-bank Financial Sector and Financial Stability*, Knut Wicksell Conference in Financial Intermediation*
Lender of Last Resort, Buyer of Last Resort, and a Fear of Fire Sales in the Sovereign Bond Market (with Viral Acharya and Sascha Steffen), July 2016, revised September 2018.
Abstract: We document the mechanism through which the risk of fire sales in the sovereign bond market contributed to the effectiveness of two major central bank interventions designed to restore financial stability during the European sovereign debt crisis. As a lender of last resort via the long-term refinancing operations (LTROs), the European Central Bank (ECB) improved the collateral value of sovereign bonds of peripheral countries. This resulted in an elevated concentration of these bonds in the portfolios of domestic banks, increasing fire-sale risk and making both banks and sovereign bonds riskier. In contrast, the ECB’s announcement of being a potential buyer of last resort via the Outright Monetary Transaction (OMT) program attracted new investors and reduced fire-sale risk in the sovereign bond market.
Presentations: Board of Governors of the Federal Reserve, Copenhagen, CREST, ESMT, European Stability Mechanism, Lausanne, Lugano, St Gallen, Mannheim, Neuchatel, Pompeau Fabra, Villanova University, ZEW, University of Southern Denmark, IBEFA 2015, IAES 2015, SAFE-Deutsche Bundesbank-ESMT-CEPR 2015 conference, AFGAP/ALMA 2015 summer conference, Baffi Carefin Bocconi University 2015 conference, Federal Reserve Bank of Atlanta workshop on “The Role of Liquidity in the Financial System,” Chicago Financial Institutions Conference, 9th Swiss Winter Conference of Financial Intermediation, Risk Management Academic Conference of the University of Connecticut, ABFER 2016, SFI Research Days 2016, Day-ahead EFA Norges Bank conference 2016, AFA 2017, 4th International Conference on Sovereign Bond Markets, AEA 2018, SFS Cavalcade 2018, EEA 2018, ECB Workshop on Money Markets and Central Bank Balance Sheets, Closing Conference “Quantitative Easing and Financial (In)Stability”
Capital Requirements and Regulatory Arbitrage: A Quantitative Analysis (with Roberto Steri), work in progress.
Systemic Risk and the Solvency-Liquidity Nexus of Banks, International Journal of Central Banking, 2015, 11(3), pp. 193-227.
Abstract: This paper highlights the empirical interaction between solvency and liquidity risks of banks that make them particularly vulnerable to an aggregate crisis. In line with the literature explaining bank runs based on the quality of the bank’s fundamentals, I find that banks lose their access to short-term funding when markets expect they will be insolvent in a crisis. This solvency-liquidity nexus is found to be strong under many robustness checks and to contain useful information for forecasting the short-term balance sheet of banks. The results suggest that capital does not only act as a loss-absorbing buffer; it also ensures the confidence of creditors to continue to provide funding to the banks in a crisis.
Testing Macroprudential Stress Tests: The Risk of Regulatory Risk Weights (with Viral Acharya and Robert Engle), Journal of Monetary Economics, 2014, 65, pp. 36-53.
Abstract: Macroprudential stress tests have been employed by regulators in the United States and Europe to assess and address the solvency condition of financial firms in adverse macroeconomic scenarios. Financial institutions are required to maintain a capital cushion against such events and stress tests are designed to assess if it is adequate. If it is not, then the capital shortfall is the additional capital needed. We compare the capital shortfall measured by regulatory stress tests, to that of a benchmark methodology — the “V-Lab stress test” — that employs only publicly available market data. We find that when capital shortfalls are measured relative to risk-weighted assets, the ranking of financial institutions is very different from the V-Lab stress test, whereas when measured relative to total assets, the results are quite similar. We show that the risk measures used in risk-weighted assets are cross-sectionally uncorrelated with market measures of risk as they do not account for the “risk that risk will change.” Furthermore, the firms that appeared to be best capitalized relative to risk-weighted assets were no better than the rest when the European economy deteriorated into the sovereign debt crisis in 2011.
Executive summary on Voxeu.org
Covered in FT (11/09/14)
BoE-CEPR-Imperial-LSE Conference on Non-bank Financial Sector and Financial Stability, London, October 2019
LSF Asset Management Summit, Luxembourg, October 2019
FMA, New Orleans, October 2019
ECB conference on money markets and monetary policy, Frankfurt, November 2019
University of Zurich, November 2019
Showcasing Women in Finance - EU, Luxembourg, November 2019
Knut Wicksell Conference in Financial Intermediation, Lund, November 2019
AEA, San Diego, January 2020
(with Sascha Steffen), November 6, 2018.
(with Sascha Steffen), November 2, 2018.
High time to tell European banks: No dividends (with Viral Acharya and Sascha Steffen), August 4, 2016.
European Banks (with Viral Acharya and Sascha Steffen), August 1, 2016.
Capital Shortfalls of European Banks since the Start of the Banking Union (with Viral Acharya and Sascha Steffen), July 28, 2016.