Research

Working Papers

Banks’ Foreign Currency Exposure and the Real Effects of Exchange Rate Shocks (R&R at the Review of Financial Studies)

Abstract: In contrast to standard theory, recent empirical evidence shows that currency depreciations are not always expansionary. I show that a bank lending channel of exchange rates can explain this disconnect. I provide causal evidence on the importance of this channel using a large and unanticipated currency appreciation shock from Switzerland. I construct a novel dataset on foreign currency exposure of Swiss banks and bank-firm relationships, and show that the currency appreciation shock enabled banks with net foreign currency liability exposure to increase lending, allowing firms to increase investment. The bank lending channel thus partially offsets the negative effect of currency appreciation on exports, explaining the muted response of aggregate output to the shock. I also construct a new historical database on banks’ foreign currency exposure for a sample of 43 countries and provide evidence on the general importance of this channel across historical global currency depreciations.

Lending by Servicing: Monetary Policy Transmission through Shadow Banks (with Malin Hu, Raluca Roman, and Keling Zheng) R&R at the Review of Financial Studies

Abstract: We propose a new conceptual framework for monetary policy transmission through shadow banks in the mortgage market that highlights the role of mortgage servicing in generating non-deposit funds for lending. We document that mortgage servicing acts as a natural hedge against interest rate shocks and dampens the effect of monetary policy on shadow bank mortgage lending. Higher interest rates reduce prepayment risk, increasing the collateral value of mortgage servicing assets and cashflow from servicing income. This enables shadow banks with greater exposure to mortgage servicing to obtain more funding. The mortgage servicing channel is weaker for traditional banks due to their reliance on deposit funding and the capital charge on mortgage servicing assets. Our estimates imply that the rising share of shadow banks in mortgage servicing has weakened the pass-through of monetary policy to aggregate mortgage lending.

Making Stable Coins Stable(r): Can Regulation Help? (with Tirupam Goel and Ulf Lewrick) R&R at the Review of Finance

Abstract: Stablecoins engage in liquidity transformation, exposing both direct stakeholders and the broader financial system to risks as their scale grows. This paper develops a dynamic model of stablecoin issuers to study how their privately optimal liquidity management strategy shapes these risks and how regulation can mitigate them. We show that, absent regulation, issuers tilt their portfolios away from cash and toward interest-bearing but relatively less liquid bonds, raising default risk and amplifying spillovers via forced bond sales. Indeed, when benefiting from particularly large subscriptions, unregulated issuers hold no cash at all. We demonstrate that both liquidity and capital requirements reduce default risk and limit spillovers, but they do so through distinct mechanisms: enhanced liquidity helps avoid forced bond sales, whereas capital helps absorb any bond sale costs. Using data on stablecoins and the U.S. Treasury market, we find that combining a 1% capital requirement with a 30% liquidity requirement can reduce default probabilities to about 0.2% and cap the expected price impact of bond sales. By mapping policy objectives—namely limiting default risk and market spillovers—to regulatory tools, our analysis provides a tractable framework for calibrating prudential requirements for stablecoins.

Differential Crowding out Effects of Government Bonds and Loans: Evidence from an Emerging Market Economy (with David Jaume, Everardo Tellez, and Martin Tobal) R&R at the Review of Finance

Abstract: We provide the first empirical evidence that the “type” of bank lending to the government affects the extent of crowding out in an Emerging Market and Developing Economy (EMDE). For this purpose, we build a new dataset combining proprietary information on all loans granted by commercial banks to non-financial private firms and the government in Mexico, along with data on government bonds held by these banks. By exploiting heterogeneity in firms’ exposure to different types of bank lending to the government within this unique dataset, we show for the first time that the size of crowding out of credit to small and medium-sized firms (SMEs) varies significantly across debt instruments. Specifically, we find that the crowding-out effect is around three times larger for bank loans than for bank holdings of government bonds. This reduced crowding-out effect of bonds is linked to banks’ ability to use them as collateral in the interbank market, which helps them raise secured funding and reduces the need to curtail credit supply to firms. Our findings underscore the importance of welldeveloped sovereign bond markets in mitigating the adverse effects of government borrowing on credit access for SMEs, particularly in EMDEs where credit markets are underdeveloped and these firms are more credit-constrained.

The Impact of Private Money Creation: Asset Allocation and “Opacity Discount” in Bank Lending (with Jan Bena and Joyce Xuejing Guan)

Abstract: This paper examines how the private money creation function of financial intermediaries influences their asset composition and firms’ cost of debt. Following Dang, Gorton, Holmström, and Ordonez (2017), we hypothesize that intermediaries create money-like liabilities by backing them with assets that are safe and opaque, thereby minimizing information sensitivity. Using a quasi-natural experiment—the 2014 U.S. MMF reform—we show that changes in the moneyness of MMF liabilities significantly impact their asset allocation. Institutional MMFs reduced their portfolio weight of opaque assets—defined as holdings not disclosed by the MMF—by 40%. Furthermore, firm-level analysis of syndicated loans and bond issuances reveals that positive information acquisition cost shocks to borrowers reduce the loan-bond spread—the relative cost of firm financing using bank loans versus the public bond market—highlighting the “opacity discount” in bank lending. Instrumental variable estimation and event studies support the causal interpretation of our findings.

Beyond the Fundamentals: How Media-Driven Narratives Influence Cross-Border Capital Flows (with Wentong Chen and Eswar Prasad)

Abstract: This paper offers the first empirical evidence on how domestic media-driven narratives about a destination country shape cross-border institutional investment flows. Leveraging natural language processing techniques on over a million articles from 38 newspapers, we construct sentiment and risk indices based on media narratives about China across 15 economies between 2007 and 2022. Our findings reveal significant cross-country variation in these narratives, driven by differences in both topic coverage and within-topic sentiment. Crucially, media narratives significantly influence portfolio flows, even after controlling for macroeconomic and financial fundamentals. The impact of media narratives on flows is smaller for investors with greater familiarity or private information about China and more substantial during periods of heightened uncertainty. Political and environmental narratives influence investment flows as much as, or more than, economic narratives. These findings suggest that media narratives have a greater influence on investment flows when reliable market data is scarce or challenging to interpret. We also find that media narratives have an asymmetric impact on investment, with investors reacting more sharply to negative narratives than positive ones. These results underscore the important role of media-driven narratives in shaping global capital flows, particularly in an era of intensifying geopolitical and economic uncertainty.

 

Autocracies, Infrastructure Financing, and Credit Spreads (with Ron Giammarino, Alberto Teguia, and Emmanuel Yimfor)

Abstract: We examine the role of autocratic restrictions on property rights in explaining debt financing of infrastructure and the associated credit spreads. We focus on two autocratic powers; the ability to restrict out-migration and the ability to expropriate output. We show how these two restrictions provide a deeper basis for the “democracy advantage,” the claim that democracies obtain better financing terms than autocracies. We show theoretically and empirically that restrictions on migration enhance debt repayment, increase the degree to which infrastructure is debt financed, and reduce credit spreads while the ability to expropriate wealth has the opposite affect.

Publications

Inflation and Disintermediation (with Matthew Baron), Journal of Financial Economics, October 2024

Abstract: We test a bank credit channel through which unexpected increases in inflation lead to short-run macroeconomic fluctuations. For identification, we study an unexpected U.S. inflation increase in early 1977 and exploit differences in state-level reserve requirements for Federal Reserve nonmember banks, which create differences in banks’ inflation exposures. More exposed banks cut lending, reducing local house prices and construction employment. We provide evidence for potential mechanisms, including a bank net wealth and a loan misallocation channel. Our results suggest that an important consequence of inflation is its impairment of the banking sector.

Bank Regulation and Supervision: A Symbiotic Relationship (with Tirupam Goel)  Journal of Banking and Finance, May 2024

Abstract: Supervisory assessments such as stress-tests gauge banks’ riskiness and allow regulators to impose bank-specific capital regulation. This can improve welfare. Yet, regulation based on noisy supervision can decrease welfare by mis-classifying banks, distorting incentives, and creating riskier banks. Regulation should not be bank-specific in such cases. When bank defaults are costlier, supervision should lower the probability that riskier banks go undetected, i.e., reduce false-negatives even if this leads to more false-positives. When the supervisor can conduct a more comprehensive but costlier assessment that optimally reduces both false-positive and false-negative rates, the regulator should make capital requirements more bank specific.

 The Determinants of China’s International Portfolio Equity Allocations (with Grace Weishi Gu and Eswar Prasad), IMF Economic Review, May 2020 (previously circulated as China’s Impact on Global Financial Markets, NBER Working paper No. 26311)

Abstract: We analyze shifts in the structure of China’s capital outflows over the past decade. The composition of gross outflows has shifted from accumulation of foreign exchange reserves by the central bank to nonofficial outflows. Unlocking the enormous pool of domestic savings could have a significant impact on global financial markets as China continues to open up its capital account and as domestic investors look abroad for returns and diversification. We analyze in detail the allocation patterns of Chinese institutional investors (IIs), which constitute the main channel for foreign portfolio investment outflows. We find that, relative to benchmarks based on market capitalization, Chinese IIs underweight developed countries and high-tech sectors in their international portfolio allocations but overinvest in high-tech stocks in developed countries. To further examine Chinese IIs’ joint decisions on destination country-sector pairs, we construct continuous measures of revealed relative comparative advantage and disadvantage in a sector for a country based on trade patterns. We find that, in their foreign portfolio allocations, Chinese IIs overweight sectors in which China has a comparative disadvantage. Moreover, Chinese IIs concentrate such investments in countries that have higher relative comparative advantage in those sectors. Diversification and information advantages related to foreign imports to China seem to influence patterns of foreign portfolio allocations, while yield-seeking and learning motives do not.

Commodity Prices and Bank Lending (with Rupa Duttagupta and Andrea Presbitero), Economic Inquiry, August 2019

Abstract: We analyze the transmission of changes in commodity prices to bank lending in a large sample of developing countries. A bank-level analysis shows that a fall in commodity net export prices is associated with a reduction of bank lending, particularly for commodity exporters and during episodes of terms-of-trade decline. We complement this analysis with loan-level data from a credit register, which allows us to identify the effect of a commodity price shock on the supply of credit, controlling for unobserved factors that could drive borrowers’ credit demand. Results show that banks with relatively lower deposits and poor asset quality transmit the changes in commodity prices to lending more aggressively.

A Vision and Action Plan for Financial Sector Development and Reforms in India (with Eswar Prasad), Brookings Institution Report, January 2018.

Discussions

Out of Sight, Out of Mind: Nearby Branch Closures and Small Business Growth (Ben Ranish, Andrea Stella, and Jeffery Zhang), Spring Finance Workshop, April 2025

EXIM’s Exit: The Real Effects of Trade Financing by Export Credit Agencies (Adrien Matray, Karsten Muller, Chenzi Xu, and Poorya Kabir), NFA, September 2024 

How do Supply Shocks to Inflation Generalize? Evidence from the Pandemic Era in Europe (Viral Acharya, Matteo Crosignani, Tim Eisert, and Christian Eufinger), EFA, August 2024

Business Inflation Exposure and Bank Lending (Ricardo Correa, Teodora Paligorova, Andrei Zlate), IBEFA, July 2024

Creditor Coalitions in Bankruptcy (Jingzhi Huang, Stefan Lewellen, Zhe Wang), pre-WFA ECWFC, June 2024

Stagflationary Stock Returns (Ben Knox and Yannick Timmer), SFS Cavalcade, May 2024

The Secular Decline in Interest Rates and the Rise of Shadow Banks (Andrés Sarto and Olivier Wang), FSU Truist Beach Conference, April 2024

Closing the Revolving Door  (Joseph Kalmenovitz, Siddharth Vij, and Kairong Xiao), FIRS 2023

Can Cashless Payments Spur Economic Growth? (Tamanna Singh Dubey and Amiyatosh Purnanandam), Columbia Summit on the Indian Economy, March 2023

Bank Funding Risk, Reference Rates, and Credit Supply (Harry Cooperman, Darrell Duffie, Stephan Luck, Zachry Wang, and Yilin Yang), ASU Sonoran Winter Finance Conference 2023

  • Best Discussant Award

Open Banking under Maturity Transformation (Itay Goldstein, Chong Huang, Liyan Yang), NFA 2022

Political Power-Sharing, Firm Entry, and Economic Growth: Evidence from Multiple Elected Representatives (Harsha Dutta, Pulak Ghosh, Arkodipta Sarkar, and Nishant Vats), EFA 2022

Distributional Implications of Bank Branch Expansions: Evidence from India (Reajul Alam Chowdhury, Kanika Mahajan, and S.K. Ritadhi), SERI 2022

Measuring the Welfare Cost of Asymmetric Information in Consumer Credit Markets (Anthony A. DeFusco, Huan Tang, Constantine Yannelis), WFA 2022

The Carrot and the Stick: Bank Bailouts and the Disciplining Role of Board Appointments (Christian Mucke, Loriana Pelizzon, Vincenzo Pezone, and Anjan Thakor), SFS Cavalcade 2022

The Value of Lending Relationships (Andrew Bird, Michael Hertzel, Stephen Karolyi, and Thomas G. Ruchti), NFA 2021

Dirty Money: How Banks Influence Financial Crime (Janet Gao, Joseph Pacelli, Jan Schneemeier, Yufeng Wu), CICF 2021

Regulatory Circumvention: Underpricing and Flipping in Marketplace Lending (Shyam Venkatesan, Brian Wolfe, Jun Yang, Woongsun Yoo), MFA 2021

U.S. Populist Rhetoric and Currency Returns (Ilias Filippou, Arie E. Gozluklu, My T. Nguyen, Mark P. Taylor), FMA 2020

Operational Risk Capital (Thomas Colon, Xing Huan, and Steven Ongena), FMA 2020

Arbitrage Capital of Global Banks (Alyssa Anderson, Wenxin Du, and Bernd Schlusche), SFS Cavalcade, May 2020

Search for Yield in Large International Corporate Bonds: Investor Behavior and Firm Responses (Charles W. Calomiris, Mauricio Larrain, Sergio L. Schmukler, Tomas Williams), 8th Annual West Coast Workshop in International Finance, Seattle 2019

Depositors Disciplining Banks: The Impact of Scandals (Mikael Homanen), 8th MoFiR Workshop on Banking, Chicago 2019

Exchange Rate Exposure: Firm Level Analysis on Multinational Firms (Lei Zhu and Dazhi Zheng), Western Economic Association International (WEAI), 2018

Rent-extracting Mergers (Alex Xi He and Daniel le Maire), Graduate Student Dissertation Workshop, WEAI, 2018