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Working Paper
Evergreening
We develop a simple model of relationship lending where lenders have incentives for evergreening loans by offering better terms to less productive and more indebted firms. We detect such lending behavior using loan-level supervisory data for the United States. Low-capitalized banks systematically distort firms’ risk assessments to window-dress their balance sheets. To avoid further reductions in their capital ratios, such banks extend relatively more credit to underreported borrowers. We incorporate the theoretical mechanism into a dynamic heterogeneous-firm model to show that evergreening ...
Journal Article
Monetary Policy Cycles and Financial Stability
Recent research suggests that sustained accommodative monetary policy has the potential to increase financial instability. However, under some circumstances tighter monetary policy may increase financial fragility through two channels. First, a surprise tightening tends to reduce the market value of banks? equity and raise their market leverage, exacerbating balance sheet fragility in the short run. Second, increases in the federal funds rate have historically been followed by an expansion of assets held by money market funds, which proved to be a source of instability in the 2007-09 ...
Journal Article
Modeling Financial Crises
Research has revealed several facts about financial crises based on historical data. Crises are rare events that are associated with severe recessions that are typically deeper than normal recessions. They are usually preceded by a buildup of system imbalances, particularly a rapid increase of credit. Financial crises tend to occur after prolonged booms but do not necessarily result from large shocks. Recent work shows a novel way to replicate these facts in a standard macroeconomic model, which policymakers could use to gain insights to prevent future crises.
Working Paper
Evergreening
We develop a simple model of relationship lending where lenders have incentives for evergreening loans by offering better terms to less productive and more indebted firms. We detect such lending behavior using loan-level supervisory data for the United States. Low-capitalized banks systematically distort firms’ risk assessments to window-dress their balance sheets. To avoid further reductions in their capital ratios, such banks extend relatively more credit to underreported borrowers. We incorporate the theoretical mechanism into a dynamic heterogeneous-firm model to show that evergreening ...
Working Paper
Evergreening
We develop a simple model of relationship lending where lenders have incentives for evergreening loans by offering better terms to firms that are close to default. We detect such lending behavior using loan-level supervisory data for the United States. Banks that own a larger share of a firm's debt provide distressed firms with relatively more credit at lower interest rates. Building on this empirical validation, we incorporate the theoretical mechanism into a dynamic heterogeneous-firm model to show that evergreening affects aggregate outcomes, resulting in lower interest rates, higher ...
Working Paper
Evergreening
We develop a simple model of relationship lending where lenders have incentives for evergreening loans by offering better terms to firms that are close to default. We detect such lending behavior using loan-level supervisory data for the United States. Banks that own a larger share of a firm's debt provide distressed firms with relatively more credit at lower interest rates. Building on this empirical validation, we incorporate the theoretical mechanism into a dynamic heterogeneous-firm model to show that evergreening affects aggregate outcomes, resulting in lower interest rates, higher ...
Working Paper
Evergreening
We develop a simple model of concentrated lending where lenders have incentives for evergreening loans by offering better terms to firms that are close to default. We detect such lending behavior using loan-level supervisory data for the United States. Banks that own a larger share of a firm’s debt provide distressed firms with relatively more credit at lower interest rates. Building on this empirical validation, we incorporate the theoretical mechanism into a dynamic heterogeneous-firm model to show that evergreening affects aggregate outcomes, resulting in lower interest rates, higher ...
Working Paper
Evergreening
We develop a simple model of concentrated lending where lenders have incentives for evergreening loans by offering better terms to firms that are close to default. We detect such lending behavior using loan-level supervisory data for the United States. Banks that own a larger share of a firm’s debt provide distressed firms with relatively more credit at lower interest rates. Building on this empirical validation, we incorporate the theoretical mechanism into a dynamic heterogeneous-firm model to show that evergreening affects aggregate outcomes, resulting in lower interest rates, higher ...
Working Paper
Evergreening
We develop a simple model of relationship lending where lenders have an incentive to evergreen loans by offering better terms to less productive and more indebted firms. We detect such lending distortions using loan-level supervisory data for the United States. Low-capitalized banks systematically distort their risk assessments of firms to window-dress their balance sheets and extend relatively more credit to underreported borrowers. Consistent with our theoretical predictions, these effects are driven by larger outstanding loans and low-productivity firms. We incorporate the theoretical ...
Working Paper
Evergreening
We develop a simple model of relationship lending where lenders have an incentive to evergreen loans by offering better terms to less productive and more indebted firms. We detect such lending distortions using loan-level supervisory data for the United States. Low-capitalized banks systematically distort their risk assessments of firms to window-dress their balance sheets and extend relatively more credit to underreported borrowers. Consistent with our theoretical predictions, these effects are driven by larger outstanding loans and low-productivity firms. We incorporate the theoretical ...