Welcome to my personal homepage!

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

Here is my page on Google Scholar and my [CV].

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, 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.

Working papers

• Central Bank Digital Currency and Financial Stability (with Peter Hoffmann, Agnese Leonello, 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 remunerated CBDC as consumers' alternative to bank deposits and an endogenous risk of bank runs. Echoing widespread concerns, higher CBDC remuneration raises bank fragility by increasing consumers' withdrawal incentives. On the other hand, it also induces banks to offer more attractive deposit contracts in order to retain funding, thereby reducing fragility. This results in a U-shaped relationship between bank fragility and CBDC remuneration. We evaluate policy proposals aimed at mitigating the financial-stability risks of CBDC, such as holding limits and contingent CBDC remuneration.


• Payments and privacy in the digital economy (with Peter Hoffmann and Cyril Monnet) [Abstract] [Paper]

  
  We propose a model of financial intermediation, payments choice, and privacy in the digital economy. While digital payments enable merchants to sell goods online, they reveal information to their lender. 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). Privacy-preserving digital payments raise welfare by reducing privacy concerns, but only arrangements that enable data-sharing through consent functionalities guarantee that the social optimum is attained.



• Bank fragility and the incentives to manage risk (with Christoph Bertsch, Agnese Leonello, and Robert Marquez) [Abstract] [Paper]

  
  Shocks to banks' ability to raise liquidity at short notice can lead to depositor panics, as evidenced by recent bank failures. Why don't banks take a more active role in managing these risks? In a standard bank-run model, we show that risk management failures are most prevalent when exposures are more severe and managing risk would be particularly valuable. Bank capital and deposit insurance coverage act as substitutes for risk management on the intensive margin but as complements on its extensive margin, encouraging the adoption of risk management operations. We provide insights for the appropriate regulation of bank risk-management operations.



• 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.



• Cyber Risk and Security Investment (with Michael Brolley, David Cimon, Ryan Riordan) [Abstract] [Paper]

  
  We develop a model in which firms invest in cybersecurity to protect themselves and their clients from cyber attacks. Since cyber security investment is unobservable, firms may signal their investment to attract clients. In equilibrium, firms under-invest in cyber security. We derive testable implications for the modality of cyber attacks, the probability of a successful attack, and client fees. To raise efficiency, a regulator can impose a minimum level of security investment or legislate consumer protection that shifts the burden of cyber attacks from clients to firms. Both regulations induce firms to invest the constrained-efficient amount in cyber security.

Publications (selected)

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

  
  We study the importance of information technology (IT) in banking for entrepreneurship. Guided by a parsimonious model, we establish that job creation by young firms is stronger in US counties more exposed to banks with greater IT adoption. We present evidence consistent with banks' IT adoption spurring entrepreneurship through a collateral channel: entrepreneurship increases by more in IT-exposed counties when house prices rise. Further analysis suggests that IT improves banks' ability to determine collateral values, in particular when collateral appraisal is more complex. IT also reduces the time and cost of disbursing collateralized loans.

  Management Science, Accepted


• 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 and sell loans before maturity when in need of liquidity. Loan guarantees improve market liquidity, reduce lending standards, and can have 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 selection. This positive pecuniary externality provides a rationale for guarantee subsidies. Our results contribute to a debate about reforming government-sponsored mortgage guarantees by Fannie Mae and Freddie Mac, suggesting that the excessively high subsidies to these guarantees should be reduced but not completely eliminated.

  Management Science 70 (7), July 2024


• 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, 26 (4), July 2022, Pages 829-54


• 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


• 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: 17 September 2024