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Working Paper
The Role of Dispersed Information in Pricing Default: Evidence from the Great Recession
The recent Global Games literature makes important predictions on how financial crises unfold. We test the empirical relevance of these theories by analyzing how dispersed information affects banks' default risk. We find evidence that precise information acts as a coordination device which reduces creditors' willingness to roll over debt to a bank, thus increasing both its default risk and its vulnerability to changes in expectations. We establish two new results. First, given an unfavorable median forecast, less dispersed beliefs greatly increase default risk; this is consistent with ...
Working Paper
What Does Financial Crisis Tell Us About Exporter Behavior and Credit Reallocation?
Using Japanese firm data covering the Japanese financial crisis in the early 1990s, we find that exporters' domestic sales declined more significantly than their foreign sales, which in turn declined more significantly than non-exporters' sales. This stylized fact provides a new litmus test for different theories proposed in the literature to explain a trade collapse associated with a financial crisis. In this paper we embed the Melitz's (2003) model into a tractable DSGE framework with incomplete financial markets and endogenous credit allocation to explain both the Japanese firm-level data ...
Journal Article
The Federal Funds Market since the Financial Crisis
Before the financial crisis, the federal funds market was a market in which domestic commercial banks with excess reserves would lend funds overnight to other commercial banks with temporary shortfalls in liquidity. What has happened to this market since the financial crisis? Though the banking system has been awash in reserves and the federal funds rate has been near zero, the market has continued to operate, but it has changed. Different institutions now participate. Government-sponsored enterprises such as the Federal Home Loan Banks loan funds, and foreign commercial banks borrow.
Journal Article
How Dodd–Frank affects small bank costs
Do stricter regulations enacted since the financial crisis pose a significant burden?
Working Paper
The Real Effects of Credit Line Drawdowns
Do firms use credit line drawdowns to finance investment? Using a unique dataset of 467 COMPUSTAT firms with credit lines, we study the purpose of drawdowns during the 2007-2009 financial crisis. Our data show that credit line drawdowns had already increased in 2007, precisely when disruptions in bank funding markets began to squeeze aggregate liquidity. Consistent with theory, our results confirm that firms use drawdowns to sustain investment after an idiosyncratic liquidity shock. Using an instrumental variable approach based on institutional features of credit line contracts, we find that ...
Working Paper
Employment Effects of Unconventional Monetary Policy : Evidence from QE
This paper investigates the effect of the Federal Reserve's unconventional monetary policy on employment via a bank lending channel. We find that banks with higher mortgage-backed securities holdings issued relatively more loans after the first and third rounds of quantitative easing (QE1 and QE3). While additional volume is concentrated in refinanced mortgages after QE1, increases are driven by newly originated home purchase mortgages and additional commercial and industrial lending after QE3. Using spatial variation, we show that regions with a high share of affected banks experienced ...
Working Paper
Market Discipline in the Secondary Bond Market: The Case of Systemically Important Banks
We investigate the association between the yields on debt issued by U.S. systemically important banks (SIBs) and their idiosyncratic risk factors, macroeconomic factors, and bond features, in the secondary market. Although greater SIB risk levels are expected to increase debt yields (Evanoff and Wall, 2000), prevalence of government safety nets complicates the market discipline mechanism, rendering the issue an empirical exercise. Our main objectives are twofold. First, we study how bond buyers reacted to elevation of SIB-specific and macroeconomic risk factors over the recent business cycle. ...
Journal Article
Shadow banking and the crisis of 2007-08
In recent decades, institutions that function much like traditional banks have grown outside regulatory oversight. Yet, as Daniel Sanches explains, these so-called shadow banks are as vulnerable to runs as regular banks. Because banking crises can inflict lasting economic harm, economists are interested in tracing how the panic ensued in the shadow system.
Discussion Paper
Evaluating the Rescue of Fannie Mae and Freddie Mac
In September 2008, the U.S. government engineered a dramatic rescue of Fannie Mae and Freddie Mac, placing the two firms into conservatorship and committing billions of taxpayer dollars to stabilize their financial position. While these actions were characterized at the time as a temporary ?time out,? seven years later the firms remain in conservatorship and their ultimate fate is uncertain. In this post, we evaluate the success of the 2008 rescue on several key dimensions, drawing from our recent research article in the Journal of Economic Perspectives.