Publications

Off-Balance Sheet Funding, Voluntary Support and Investment Efficiency (with Anatoli Segura) 
Journal of Financial Economics, July 2020, Vol. 137(1), pp. 90-107. 
[Online Appendix] [Paper on SSRN]

• ​Financing an investment off-balance sheet gives a bank the option, but not the obligation, to use its funds to voluntarily support debt repayments when the investment fails. Such flexibility, which is absent with on-balance sheet funding, allows the bank to signal information about the quality of its future projects, improving investment efficiency. Yet, to have the capacity to provide support, the bank must keep unused funds on-balance sheet. Off-balance sheet funding with voluntary support emerges as the optimal funding mode when external financing is not too costly. In those cases, a ban on voluntary support decreases the bank's profits.

​Securitization and Optimal Foreclosure​ (with John Kuong)
Journal of Financial Intermediation, Forthcoming
[Paper on SSRN]

• Does securitization distort the foreclosure decisions of non-performing mortgages? In a model of mortgage-backed securitization with an endogenous foreclosure policy, we find that the securitizing bank adopts a tougher foreclosure policy than the first-best, despite resulting in higher loan losses. This is optimal because foreclosure mitigates the adverse selection problem in securitization by making the optimal security, a risky debt, less information-sensitive. We further show that policies that limit mortgage foreclosure would discourage the bank's ex ante screening effort, reducing the quality of securitized mortgages. Our model yields novel testable predictions on the effect of mortgage securitization on foreclosure rates, loan performance, and mortgage servicing.

Working papers

Stress Testing and Bank Lending (with Joel Shapiro)
R&R, Review of Financial Studies

• Stress tests can affect banks' lending behavior. Since regulators care about lending, banks' reactions affect the test's design and create a feedback loop. We demonstrate that there may be multiple equilibria due to strategic complementarity, possibly leading to excess default or insufficient lending to the real economy. The stress tests may be too soft or too tough. Banking supervision exams have similar properties. When the recapitalization of banks becomes more difficult, stress tests are less informative. However, when a bank is more systemic, the stress test will be more informative.​

Organizational Structure and Investment Strategy (with Gyoengyi Loranth and Alan Morrison)

• We show that a firm can use its organizational structure to commit to an investment strategy. The firm delegates sequential search and project management tasks to a manager. Ex post, the firm turns away projects that generate high project management rent. However, because the expectation of such rent serves to defray the manager's search cost, investment might be optimal ex ante. A leveraged subsidiary mitigates this time-inconsistency problem by creating ex post risk-shifting incentives that counteract underinvestment. Subsidiaries are more valuable for projects with costly search, intermediate management costs, and returns that are uncorrelated with the existing business.

Resolution of Multinational Banks: Voluntary Support and Ring-Fencing (with Gyoengyi Loranth and Anatoli Segura)
Lamfalussy Fellowship 2020, European Central Bank

• We model the resolution of an impaired subsidiary of a multinational bank and the possibility of cross-unit voluntary support under different institutional architectures. Under national authorities, for high correlation between the subsidiaries' assets, the healthy unit assets are ring-fenced, voluntary support is restricted and inefficient liquidation of the impaired unit can arise. Under a supranational authority, ring-fencing never arises, resolution outcomes are efficient, but there is a redistribution of deposit insurance costs across countries. The value gains associated with more efficient resolution outcomes under a supranational architecture incentivize ex ante bank effort and reduce risks in the two units. Supranational architecture may thereby reduce the expected deposit insurance costs in all countries even when there is large heterogeneity in the financial strength of the subsidiaries.

Contingent Capital Structure
Belgrade Young Economists Conference UnitCredit & Universities Best Paper Award 2014

• This paper studies the optimal financing contract of a bank with risk-shifting incentives and private information, in an environment with macroeconomic uncertainty. Leverage mitigates adverse selection problems owing to debt information-insensitivity, but leads to excessive risk-taking. I show that the optimal leverage is procyclical in the laissez-faire equilibrium, and contingent convertible (CoCo) bonds emerge as part of the implementation of the optimal contingent capital structure. However, the equilibrium entails excessive leverage and risk-taking, due to a bank's private incentives to minimise market mispricing of its securities. It is socially optimal to impose countercyclical capital requirements, implemented by CoCo bonds in addition to straight debt and equity.

Work in progress

Peer Monitoring and Interbank Markets
Portfolio Size and the Incentives for Shareholder Activism (with Gunter Strobl)