Research papers

REFEREED PUBLICATIONS

“Monetary Normalizations and Consumer Credit: Evidence from Fed Liftoff and Online Lending” with Isaiah Hull and Xin Zhang, International Journal of Central Banking, forthcoming.

    • Abstract:

      On December 16th of 2015, the Fed initiated “liftoff,” a critical step in the monetary normalization process. We use a unique panel dataset of 640,000 loan-hour observations to measure the cross-sectional impact of liftoff on interest rates, demand, and supply in the peer-to-peer market for uncollateralized consumer credit. We find that the spread decreased by 17%, driven by an increase in supply. Our results are consistent with an investor-perceived reduction in default probabilities; and suggest that liftoff provided a strong, positive signal about the future solvency of high credit risk borrowers. (JEL D14, E43, E52, G21)

The figure plots the time trend in the interest rate after controlling for loan and borrower composition. We recover the trend by performing a regression of the interest rate on all loan-borrower controls and computing the means of the residuals for all loans posted in the same hour. Finally, we plot the three-cohort rolling mean of the cohort-specific means over a ±14-day window around liftoff.

“Bank Misconduct and Online Lending” with Isaiah Hull, Yingjie Qi and Xin Zhang, Journal of Banking & Finance, Volume 116, July 2020.

    • Abstract:

      We introduce a high quality proxy for bank misconduct that is constructed from Consumer Financial Protection Bureau (CFPB) complaint data. We employ this proxy to measure the impact of bank misconduct on the expansion of online lending in the United States. Using nearly complete loan and application data from the online lending market, we demonstrate that bank misconduct is associated with a statistically and economically significant increase in online lending demand at the state and county levels. This result is robust to the inclusion of bank credit supply shocks and holds for both broader and more narrowly-defined bank misconduct measures. Furthermore, we show that this effect is strongest for lower rated borrowers and weakest in states with high levels of generalized trust. (JEL A13, G00, G21, K00)

The figure shows the estimated difference in the P2P’s share of total debt between treated and control counties. The horizontal axis shows the number of months that have elapsed since a major banking scandal occurred in the treatment counties. The vertical axis shows the difference in the P2P’s share of total debt. We identify the date of bank scandals through the use of newspaper articles drawn from Factiva and CFPB enforcement actions. These events are also associated with sharp increases in the number of reported CFPB complaints.

    • Keywords: financial development, consumer loans, bank misconduct, FinTech
    • An earlier version is available under the title “The Role of Trust in Online Lending” as Sveriges Riksbank Working Paper No. 346

“Spread the Word: International Spillovers from Central Bank Communication” with Hanna Armelius, Isaiah Hull and Xin Zhang, Journal of International Money and Finance, Volume 103, Pages 1-32, May 2020. – Lead article –

    • Abstract: We construct a novel text dataset to measure the sentiment component of communications for 23 central banks over the 2002-2017 period. Our analysis yields three results. First, comovement in sentiment across central banks is not reducible to trade or financial flow exposures. Second, sentiment shocks generate cross-country spillovers in sentiment, policy rates, and macroeconomic variables; and the Fed appears to be a uniquely influential generator of such spillovers, even among prominent central banks. And third, geographic distance is a robust and economically significant determinant of comovement in central bank sentiment, while shared language and colonial ties have weaker predictive power. (JEL E52, E58, F42)

The figure show the normalized rolling net sentiment scores associated with ECB speeches. Sentiment scores are computed using a dictionary-based approach documented in Loughran and McDonald (2011).

“Systematic bailout guarantees and tacit coordination” with Claudio Calcagno and Mark Le Quement, The B.E. Journal of Economic Analysis & Policy (Advances), Volume 15, Issue 1, Pages 1-36, December 2014. – Lead article –

    • Abstract: Both the academic literature and the policy debate on systematic bailout guarantees and Government subsidies have ignored an important effect: in industries where firms may go out of business due to idiosyncratic shocks, Governments may increase the likelihood of (tacit) coordination if they set up schemes that rescue failing firms. In a repeated-game setting, we show that a systematic bailout regime increases the expected profits from coordination and simultaneously raises the probability that competitors will remain in business and will thus be able to ’punish’ firms that deviate from coordinated behaviour. These effects make tacit coordination easier to sustain and have a detrimental impact on welfare. While the key insight holds across any industry, we study this question with an application to the banking sector, in light of the recent financial crisis and the extensive use of bailout schemes. (JEL D43, G21, K21, L41)

Effect of a systematic bailout policy on consumer welfare, by discount factor.

WORKING PAPERS

“A wake-up call theory or contagion” with Toni Ahnert (This version: 03/2020; First version: 06/2012)

    • Abstract: We offer a theory of contagion based on the information choice of investors after observing a financial crisis elsewhere. We study global coordination games of regime change in two regions with an unobserved common macro shock as the only link between regions. A crisis in the first region is a wake-up call to investors in the second region. It induces them to reassess the regional fundamental and acquire information about the macro shock. Contagion can occur even after investors learn that regions are unrelated (zero macro shock). Our results rationalize empirical evidence about contagious bank runs and currency crises after wake-up calls. We also derive other testable implications of the model. (D83, F3, G01, G21)

The value of information v and the proportion of informed investors n2 with and without a wake-up call, f ∈ {1, 0}. The figure shows (1) the strategic complementarity in information choices and (2) the effect of a higher level of s that increases the skewness of the macro shock and leads to an expansion of the intermediate range of information costs for which we establish the wake-up call contagion effect.

“Optimal Bank Capitalization in Crowded Markets” with Mike Mariathasan (KU Leuven)

  • Abstract:

We study banks’ optimal equity buffer in general equilibrium, as well as their ex-post response to under-capitalization. Developing a “pecking order theory” for private recapitalizations, our benchmark model identifies equity issuance as individually and socially optimal, compared to deleveraging, and conditions that invert the individually optimal ranking. Ex-ante, the imperfectly elastic supply of capital, incomplete insurance markets and costly bankruptcies give rise to inefficiently high capital shortfalls and excessive insolvencies. Abstracting from moral hazard and informational asymmetries, we therefore provide a novel rationale for macroprudential capital regulation emerges and a new set of testable implications about banks’ capital structure management.

  • Keywords: bank capital, macroprudential regulation, incomplete markets, financial market segmentation, constrained inefficiency.

“A detrimental feedback loop: deleveraging and adverse selection” 
(This version: 08/2015; First version: 09/2013)

  • Abstract:

Market distress can lead to a deleveraging wave, as in the 2007/08 financial crisis. This paper demonstrates how market distress and deleveraging can fuel each other in the presence of adverse selection in opaque asset markets. A detrimental feedback loop emerges: investors reduce their reliance on opaque markets by decreasing their leverage which in turn amplifies adverse selection. In the extreme, trade breaks down. Asymmetric information together with incomplete markets is at the root of two inefficiencies: investors’ leverage choices are distorted and investors’ liquidity management exhibits under-investment in cash. I discuss policy implications and the ambiguous role of transparency.

“A Model of Liquidity Provision with Adverse Selection”
(This version: 12/2012; First version: 12/2010)

  • Abstract:

This paper analyzes a model of liquidity provision where liquidity risk is shared in two distinct spot markets. One of them is a market for asset sales prone to an adverse selection problem and the other is a collateralized credit market, which is not subject to an adverse selection problem. I find that the increased availability of collateralized credit (ex-post) may make the adverse selection problem in the asset market more severe. As a result, the relationship between the completeness of markets and equilibrium welfare, as well as efficiency, is non-monotone. Furthermore, I generate a financial crisis by introducing an aggregate liquidity or solvency shock, which amplifies the adverse selection problem, leading to a market failure. A central bank can address this market failure by using existing market institutions to re-allocate liquidity in the economy. Interestingly, the central bank has to be willing and able to incur a loss.

  • Keywords: liquidity, asymmetric information, open market operations.

POLICY WORK

Published policy papers

“FinTech credit: Online lending platforms in Sweden and beyond” with Carl-Johan Rosenvinge (Sveriges Riksbank), The Sveriges Riksbank Economic Review 2019:2, October 2019.

    • Abstract: New digital technologies in banking and finance, commonly referred to as ‘FinTech,’ have the potential to transform established banking business models. This article studies online lending platforms, which are new players in the financial sector that allow individuals or firms to obtain loans directly from investors via the internet. To date, online lending is still small relative to total bank lending. However, online lending has expanded rapidly not only in China, the US and the UK, but also in Sweden. In 2018 Swedish platforms originated more than SEK 2bn of new loans – exceeding the 2017 volume by 51 per cent. We discuss how online lending platforms differ from commercial banks and how they are regulated. Moreover, we analyse market developments, such as the growing linkages between platforms and the banking sector. Against this backdrop, we review potential financial stability implications that may appear if online lending continues to grow in importance.

    • Keywords: FinTech credit, financial stability.

“Revisiting the role of central banks as liquidity providers – old and new challenges” with Johan Molin (Sveriges Riksbank), The Sveriges Riksbank Economic Review 2016:2, September 2016.

    • Abstract: This article offers a review of the role of central banks as providers of public liquidity. Against the backdrop of the global financial crisis of 2007-2009, we discuss various challenges for public liquidity provision and the effectiveness of central bank lending facilities. These challenges help us identify potential gaps in existing mechanisms and frameworks governing liquidity assistance. We discuss how the available liquidity policy tool kit can be used to deal with the challenges. Furthermore, we highlight modifications to existing central bank facilities during and after the global financial crisis. We point at trade-offs faced by policy makers and describe potential pitfalls for public liquidity providers. Lastly, we attempt to look ahead and outline some specific challenges posed by more recent structural, regulatory, and technological developments in the financial system.

    • Keywords: central bank liquidity assistance, liquidity provision, liquidity policy, Great Financial Crisis.

Others

I was a member of the Committee on the Global Financial System (CGFS) Working Group on Policy Challenges and Open Issues in Liquidity Assistance, which produced a report on “Designing frameworks for central bank liquidity assistance: addressing new challenges”, CGFS Papers No 58, April 2017.

Disclaimer: This is my private homepage.  The views expressed are my own and do not reflect the official views of Sveriges Riksbank.