Welcome to my personal homepage!

I am a research economist within the European Central Bank's Financial Research Division. I am also a Research Affiliate at CEPR (Banking and Corporate Finance) and a member of the Finance Theory Group.

Here is my page on Google Scholar.

Research:

Research interests

• Financial Intermediation, Central Bank Digital Currency (CBDC), Global Games, International Finance

Survey

• The Economics of CBDC (with Katrin Assenmacher, Peter Hoffmann, Agnese Leonello, Cyril Monnet, and Davide Porcellacchia) [Abstract] [Survey]

  
  This paper provides a structured overview of the burgeoning literature on the economics of CBDC. We document the economic forces that shape the rise of digital money and review motives for the issuance of CBDC. We then study the implications for the financial system and discuss of a number of policy issues and challenges. While the academic literature broadly echoes policy makers' concerns about bank disintermediation and financial stability risks, it also provides conditions under which such adverse effects may not materialize. We also point to several knowledge gaps that merit further work, including data privacy and the study of end‐user preferences for attributes of digital payment methods.

  International Journal of Central Banking, Accepted

Working papers

• Central Bank Digital Currency and Financial Stability (with Peter Hoffmann, Agnese Leonello, and Davide Porcellacchia) [Abstract] [Paper]

  
  What is the effect of Central Bank Digital Currency (CBDC) on financial stability? We answer this question by studying a model of financial intermediation with an endogenously determined probability of a bank run and a remunerated CBDC that provides consumers with an alternative to bank deposits. Consistent with concerns among policymakers, higher CBDC remuneration raises bank fragility by increasing consumers' withdrawal incentives. However, it also induces the bank to offer more attractive deposit contracts in an effort to retain funding, which reduces fragility. Accordingly, the overall relationship between bank fragility and CBDC remuneration is U-shaped. We evaluate the effects of different policy proposals aimed at reducing the financial stability implications of CBDC, and study extensions that allow for imperfect competition in deposit markets and bank risk-taking.


• The Digital Economy, Privacy, and CBDC (with Peter Hoffmann and Cyril Monnet) [Abstract] [Paper] [SUERF brief]

  
  We develop a model of financial intermediation, payment choice, and privacy in the digital economy. While digital payments enable merchants to sell goods online, they also reveal information to their bank. By contrast, cash guarantees anonymity, but limits distribution to less efficient offline venues. In equilibrium, merchants trade off the efficiency gains from online distribution (with digital payments) and the informational rents from staying anonymous (with cash). The introduction of central bank digital currency (CBDC) raises welfare by reducing the privacy concerns associated with online distribution. Payment tokens issued by digital platforms crowd out CBDC unless the latter facilitates data-sharing.



• Anticipated Financial Contagion (with with Co-Pierre Georg and Gideon DuRand) [Abstract] [Paper]

  
  We examine the incidence of financial contagion, bank choices, welfare, and regulation when interconnected banks anticipate an aggregate liquidity shock. Revisiting the seminal paper of Allen and Gale (2000), interbank deposits allow banks to co-insure against regional liquidity shocks but can also lead to contagion—the mutual default of banks. We numerically characterize the equilibrium and find that contagion is rare. Moreover, the equilibrium is constrained inefficient. For less likely aggregate liquidity shocks, banks hold inefficiently large interbank positions that over-expose surviving banks to impaired returns from failing banks when resolution occurs at market values. Efficiency can be restored via an alternative bank resolution scheme.



• Safe Assets and Financial Fragility (with Marco Macchiavelli) [Abstract] [Paper]

  
  Using the 2013 debt limit episode in the Unites States and the introduction of the Federal Reserve's Overnight Reverse Repurchase (ONRRP) facility as a quasi-natural experiment, we document novel financial stability benefits from the public provision of safe assets. Specifically, we show that access to safe assets—the ONRRP—attenuates investor redemptions from money market funds and allows these funds to maintain their lending to corporations in times of stress. We then rationalize our empirical findings with a global-game model of investor redemptions from money funds that finance corporate borrowers and hold safe assets.



• Does IT help? Information Technology in Banking and Entrepreneurship (with Sebastian Doerr, Nicola Pierri, Yannick Timmer) [Abstract] [Paper]

  
  We provide novel evidence on the importance of information technology (IT) in banking for entrepreneurship. We establish that job creation by young firms is stronger in US counties more exposed to IT-intensive banks. We present evidence consistent with banks' IT adoption facilitating entrepreneurship by improving banks' use of hard information, in particular collateral. At the county level, entrepreneurship increases by more in IT-exposed counties when house prices rise. Bank-level regressions confirm that banks' IT makes credit supply more responsive to changes in house prices, and that it reduces the importance of geographical distance between borrowers and lenders.



• Government Loan Guarantees, Market Liquidity and Lending Standards (with Martin Kuncl) [Abstract] [Paper]

  
  We study third-party loan guarantees in a model in which lenders can screen, learn loan quality over time and can sell loans before maturity when in need of liquidity. Loan guarantees improve market liquidity and reduce lending standards, with a positive overall welfare effect. Guarantees improve the average quality of non-guaranteed loans traded and thus the market liquidity of these loans due to both selection and commitment. Because of this positive pecuniary externality, guarantees are insufficient and should be subsidized. Our results contribute to a debate about reforming government-sponsored mortgage guarantees by Fannie Mae and Freddie Mac.



• Trading for Bailouts (with Caio Machado, Ana Elisa Pereira) [Abstract] [Paper]

  
  Government interventions such as bailouts are often implemented in times of high uncertainty. Policymakers may therefore rely on information from financial markets to guide their decisions. We study a model in which a policymaker learns from market activity and traders have high private stakes in the intervention. We discuss how the presence of such traders affects intervention outcomes, and show that it reduces market informativeness and the efficiency of bailouts. Regarding normative implications, we show that a higher social cost of interventions and a gradual implementation of assistance can improve market informativeness and raise overall welfare.



• Bank Runs, Bank Competition and Opacity (with David Martinez-Miera) [Abstract] [Paper]

  
  We model the opacity and deposit rate choices of banks that imperfectly compete for uninsured deposits, are subject to runs, and face a threat of entry. We show how shocks that increase bank competition or bank transparency increase deposit rates, costly withdrawals, and thus bank fragility. Therefore, perfect competition is not socially optimal. We also propose a theory of bank opacity. The cost of opacity is more withdrawals from a solvent bank, lowering bank profits. The benefit of opacity is to deter the entry of a competitor, increasing future bank profits. The excessive opacity of incumbent banks rationalizes transparency regulation.

Publications

• Real Interest Rates, Bank Borrowing, and Fragility (with Kartik Anand, Philipp Koenig) [Abstract] [Paper]

  
  How do real interest rates affect financial fragility? We study this issue in a model in which bank borrowing is subject to rollover risk. A bank's optimal borrowing trades off the benefit from investing additional funds into profitable assets with the cost of greater risk of a run by bank creditors. Changes in the interest rate affect the price and amount of borrowing, both of which in influence bank fragility in opposite directions. Thus, the marginal impact of changes to the interest rate on bank fragility depends on the level of the interest rate. Finally, we derive testable implications that may guide future empirical work.

  Journal of Money, Credit and Banking, Accepted.


• A wake-up call theory of contagion (with Christoph Bertsch) [Abstract] [Paper]

  
  We offer a theory of financial 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 linked by an initially unobserved macro shock. A crisis in region 1 is a wake-up call to investors in region 2. It induces them to reassess the regional fundamental and acquire information about the macro shock. Contagion can occur even after investors learn that region 2 has no ex-post exposure to region 1. We explore normative and testable implications of the model. In particular, our results rationalize evidence about contagious currency crises and bank runs after wake-up calls and provide some guidance for future empirical work.

  Review of Finance, Volume 26 (4), July 2022, Pages 829-54.


• Cheap but Flighty: A Theory of Safety-seeking Capital Flows (with Enrico Perotti) [Abstract] [Paper]

  
  We offer a model of financial intermediaries as safe-asset providers in an international context. Investors from countries exposed to expropriation risk seek to invest in safe-haven countries in order to satisfy a demand for safety. Intermediaries compete for such cheap funding by carving out safe claims, which requires demandable debt. While these safety-seeking inflows allow developed countries to lower their funding cost and expand investment, risk-intolerant investors achieve safety by withdrawing even under minimal residual risk. As a result, safety-seeking inflows into developed countries not only reallocate but also create risk. Early liquidation inefficiently diverts scarce resources from productive uses, so a domestic planner wishes to contain the scale of safety-seeking inflows. A macroprudential regulator imposes a Pigouvian tax on safety-seeking inflows.

  Journal of Banking and Finance, Volume 131 (C), 2021


• Macroprudential FX Regulations: Shifting the Snowbanks of FX Vulnerability? (with Kristin Forbes, Christian Friedrich, Dennis Reinhardt) [Abstract] [Paper]

  
  We use a new dataset on macroprudential FX regulations to evaluate their effectiveness and unintended consequences. Our results support the predictions of a model in which banks and markets lend in different currencies, but only banks can screen firm productivity. Regulations significantly reduce bank FX borrowing, but firms respond by increasing FX debt issuance. Moreover, regulations reduce bank sensitivity to exchange rates, but are less effective at reducing the sensitivity of the broader economy. Therefore, FX regulations on banks mitigate bank vulnerability to currency fluctuations and the global financial cycle, but appear to partially shift the snowbanks of vulnerability elsewhere.

  Journal of Financial Economics, 140(1), April 2021, Pages 145-74


• Should bank capital regulation be risk sensitive? (with James Chapman, Carolyn Wilkins) [Abstract] [Paper]

  
  We present a simple model of the risk sensitivity of bank capital regulation. A banker funds a project with uninsured deposits and costly capital, where capital resolves a moral hazard problem in the choice of the probability of default (PD). Investors are uninformed about the project's high or low loss given default (LGD) but a regulator receives a noisy signal and imposes minimum capital requirements. We show that the sensitivity of capital regulation to measured risk is non-monotonic. For an inaccurate signal, the regulator pools banker types via risk-insensitive capital requirements. For an accurate signal, the regulator separates types via risk-sensitive capital requirements. For an even more accurate signal, the risk sensitivity of bank capital requirements falls.

  Journal of Financial Intermediation, Volume 46, April 2021


• Bank Runs, Portfolio Choice and Liquidity Provision (with Mahmoud Elamin) [Abstract] [Paper]

  
  We examine the portfolio choice of banks in a micro-founded model of runs. To insure risk-averse investors against liquidity risk, competitive banks offer demand deposits. We use global games to link the probability of a run to the bank's portfolio management. Based upon interim information about risky investment, banks liquidate investments to hold a safe asset. This partial hedge against investment risk reduces the withdrawal incentives of investors for a given deposit rate. As a result, (i) banks provide more liquidity ex ante (so banks offer a higher deposit rate) and (ii) the welfare of investors increases. Our results highlight the management of both sides of a bank's balance sheet and a complementarity in the two forms of insurance that banks provide to investors.

  Journal of Financial Stability, 50, October 2020


• Asset Encumbrance, Bank Funding and Fragility (with Kartik Anand, Prasanna Gai, James Chapman) [Abstract] [Paper]
  Review of Financial Studies, 32 (6), June 2019, Pages 2422-55

  
  We model asset encumbrance by banks subject to rollover risk and study the consequences for fragility, funding costs, and prudential regulation. A bank's privately optimal encumbrance choice balances the benefit of expanding profitable yet illiquid investment, funded by cheap long-term senior secured debt, against the cost of greater fragility from runs on unsecured debt. We derive testable implications about encumbrance ratios. The introduction of deposit insurance or wholesale funding guarantees induces excessive encumbrance and fragility. Ex-ante limits on asset encumbrance or ex-post Pigovian taxes eliminate such risk-shifting incentives. Our results shed light on prudential policies currently pursued in several jurisdictions.



• Information Contagion and Systemic Risk (with Co-Pierre Georg) [Abstract] [Paper]

  
  We examine the effect of ex-post information contagion on the ex-ante level of systemic risk defined as the probability of joint default of banks. Because of counterparty risk or common exposures, bad news about one bank reveals valuable information about another bank and trigger information contagion. When banks are subject to common exposures, information contagion induces small adjustments to bank portfolios and therefore increases systemic risk overall. When banks are subject to counterparty risk, by contrast, information contagion induces a large shift toward more prudential portfolios and therefore reduces systemic risk.

  Journal of Financial Stability, 35, April 2018, Pages 159-71


• Information choice and amplification of financial crises (with Ali Kakhbod) [Abstract] [Paper]

  
  We propose an amplification mechanism of financial crises based on the information choice of investors. Information acquisition always makes investors more likely to act against what is suggested by the prior. Deteriorating public news under an initially strong (weak) prior increases (reduces) the value of private information and induces more (less) information acquisition. Deteriorating public news always increases the probability of a crisis, since the initially strong (weak) prior suggests do-not-attack (attack). This effect is amplified when information choices are endogenous. To enhance financial stability, a policymaker can use taxes and subsidies to affect information acquisition. We also derive implications about the magnitude of amplification and discuss how these can be tested.

  Review of Financial Studies, 30 (6), June 2017, Pages 2130-78


• Rollover Risk, Liquidity and Macroprudential Regulation [Abstract] [Paper]

  
  I study rollover risk in wholesale funding markets when intermediaries hold liquidity ex ante and fire sales may occur ex post. Multiple equilibria exist in a global rollover game: intermediate liquidity holdings support equilibria with both positive and zero expected liquidation. A simple uniqueness refinement pins down the private liquidity choice, which balances the forgone expected return on investment with reduced fragility and costly liquidation. Due to fire sales, liquidity holdings are strategic substitutes. Intermediaries free ride on the holdings of other intermediaries, causing excessive liquidation. To internalize the systemic nature of liquidity, a macroprudential authority imposes liquidity buffers.

  Journal of Money, Credit and Banking, 48 (8), December 2016, Pages 1753-85.

Last update: 24 May 2023