Working Papers

Banks’ Foreign Currency Exposure and the Real Effects of Exchange Rate Shocks

Abstract:This paper shows that banks’ net foreign currency exposure is an important channel through which exchange rate shocks get transmitted to the real economy. I construct a new dataset on net foreign currency exposures of Swiss banks and exploit the large and unanticipated currency appreciation episode from Switzerland in January 2015 to identify the causal impact of exchange rate shocks on economic activity. I find that the appreciation of the Swiss franc enabled banks with a net foreign currency liability exposure to expand credit supply. Non-financial firms that had a pre-shock relationship with positively affected banks were able to invest more, partially offsetting the negative effects of domestic currency appreciation on exports. At the firm-level, I compare this bank-lending channel with the trade channel and the corporate balance sheet channel and show how exchange rate shocks can have heterogeneous effects on the economy depending on the relative strengths of these channels. Extending my findings to historical currency depreciation episodes over the 1950-2016 period, I provide suggestive evidence that foreign currency exposure of the banking sector can explain the differential response of economic activity to exchange rate shocks across countries. The bank-lending channel of exchange rates can thus explain why currency appreciations are not always contractionary and currency depreciations not always expansionary.

Inflation and Disintermediation (with Matthew Baron)

Abstract: In a country-level panel from 1870 to 2016, large increases in inflation are associated with lower future bank credit-to-GDP, even in the absence of monetary tightening. The lending contraction is primarily driven by banks with balance sheets most negatively exposed to inflation increases. To better understand how inflation shocks transmit to the macroeconomy through a banking channel, we study an unexpected inflation increase in the U.S. in early-1977. Our identification strategy exploits differences in reserve requirements across U.S. states for Fed nonmember banks, leading banks to be differentially exposed to unexpected inflation increases. More exposed banks reduce lending, which in turn reduces new mortgages, construction employment, and credit to bank-dependent firms. Our results suggest that an important consequence of inflation is its distortion of the banking sector.

Limits of stress-test based bank regulation: Cues from the COVID-19 crisis (with Tirupam Goel)

Abstract: Stress-tests provide complementary information about banks’ riskiness and enable regulators to better align baseline capital requirements to individual banks. However, Type-I/II errors can lead to excessive (insufficient) regulation of a less (more) risky bank. Using the COVID-19 crisis as a testing ground for stress-tests, we uncover discordance in the performance of banks in the 2020 stress-test in the U.S. compared to their actual performances during the crisis. We develop a model to show that inaccuracies in regulatory assessments can hamper banks’ ex-ante incentives to improve risk-return profiles. Thus, inaccuracies rationalize limits to the sensitivity of regulation to stress-test results.


 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.

Work in Progress

Differential crowding out effects of government bonds and government loans (with David Jaume, Martin Tobal and Everardo Tellez)


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