Working Papers
Bailouts, Bail-ins, and Banking Industry Dynamics (JMP)
Finalist for the ECB Young Economist Prize 2022
Following bailouts of large banks during the Global Financial Crisis (GFC), policymakers adopted a new way to resolve bank failures called the “bail-in”. Bail-in policies stabilize distressed banks using the banks’ internal funds rather than external government money. This policy change alters the payoffs to banks’ creditors and shareholders and in response, banks re-optimize their balance sheets. To quantify and decompose the impact of these changes on the aggregate banking industry, I build a quantitative model of heterogeneous bank entry and exit with bailouts for large banks and calibrate it to the pre-GFC U.S. banking industry. In a counterfactual in which bail-in replaces bailout, uninsured debt prices are higher, and the benefits to becoming a big bank are lessened. Ex-ante riskier banks experience the largest change in debt prices and fewer grow to be big banks. Therefore, the failure rate of big banks drops by 77%. The bank size distribution shifts towards smaller banks but more banks enter to meet loan demand. The share of loans made by safer banks increases, improving the efficiency of the banking sector.
Corporate Bond Market Intervention and Firm Acquisition Activity
with Shannon Sledz
We study the relationship between corporate bond market conditions and acquisition activity by analyzing the Federal Reserve’s intervention in the market in 2020 and an acquisition wave in 2021. Following the announcement of the Fed’s Corporate Credit Facilities, firms with credit ratings issued a record-breaking number of bonds. An acquisition wave soon followed. Upon constructing a dataset of firm characteristics, bond issuance decisions, acquisition activity, and Credit Default Swap (CDS) spreads, we study the connection between these two events. Using a differences-in-differences approach, we find a positive association between a change in cash in the post-announcement period and the likelihood of performing an acquisition. Further, we find suggestive evidence that this post-announcement cash effect is coming from bond issuance: issuing a bond during the duration of the CCFs increases the log odds ratio of conducting an acquisition by .215. We provide preliminary results that a lowered cost of capital led to these acquisitions, using a change in CDS spreads as an instrument for treatment intensity from the Fed’s announcement.
Works-In-Progress
Stress Test Requirements and Interest Rate Risk
with Cody Kallen
Publications
Complexity in Large U.S. Banks with Linda S. Goldberg
Federal Reserve Bank of New York Economic Policy Review, Volume 26 Number 2, March 2020
Blog Posts
“Have the Biggest U.S. Banks Become Less Complex?” with Linda Goldberg. Federal Reserve Bank of New York Liberty Street Economics (blog), May 7, 2018.
“Just Released: Bank Loan Performance Under the Microscope.” with James Vickery. Federal Reserve Bank of New York Liberty Street Economics (blog), June 1, 2017.