Three essays on bank risk-taking from a portfolio perspective

This dissertation studies three distinct aspects of bank risk-taking from a novel portfolio perspective. First, I provide compelling evidence demonstrating that banks with high industry exposure adeptly adapt loan contract design to prevent potential adverse effects on loan portfolio value arising from the interaction between rival borrowers. Second, I stress the importance of banks’ pre-existing exposure and asset concentration in characterizing the risk-shifting incentives of banks enjoying government guarantees coverage. Last, I show that government guarantees coverage prompts bank risk-shifting at the intensive margin, and induces borrowers to leverage excessively, overinvest, and engage in low-quality projects. Altogether, I highlight the importance of pre-existing exposure in shaping banks’ risk management incentives and its connection to two key issues: the rise in bank concentration and the extent of government guarantees coverage. These findings carry noteworthy implications for bank lending behavior and loan contract design, ultimately impacting borrowers’ corporate policy and potentially giving rise to unintended policy consequences

Whatever it takes: The real effects of unconventional monetary policy

Launched in Summer 2012, the European Central Bank’s (ECB) Outright Monetary Transactions (OMT) program indirectly recapitalized European banks through its positive impact on periphery sovereign bonds. However, the stability reestablished in the banking sector did not fully translate into economic growth. We document zombie lending by banks that remained weakly capitalized even post-OMT. In turn, firms receiving loans used these funds not to undertake real economic activity, such as employment and investment, but to build cash reserves. Creditworthy firms in industries with a high zombie firm prevalence significantly suffered from this credit misallocation, which further slowed the economic recovery. Received March 21, 2018; editorial decision November 13, 2018 by Editor Philip Strahan. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online

Whatever it Takes: The Real Effects of Unconventional Monetary Policy

Launched in Summer 2012, the European Central Bank (ECB)’s Outright Monetary Transactions (OMT) program indirectly recapitalized European banks through its positive impact on periphery sovereign bonds. However, the stability reestablished in the banking sector did not fully translate into economic growth. We document zombie lending by banks that remained undercapitalized even post-OMT. In turn, firms receiving loans used these funds not to undertake real economic activity such as employment and investment but to build up cash reserves. Creditworthy firms in industries with a high zombie firm prevalence suffered significantly from this credit misallocation, which further slowed down the economic recovery

Whatever it Takes: The Real Effects of Unconventional Monetary Policy

Launched in Summer 2012, the European Central Bank (ECB)’s Outright Monetary Transactions (OMT) program indirectly recapitalized European banks through its positive impact on periphery sovereign bonds. However, the stability reestablished in the banking sector did not fully translate into economic growth. We document zombie lending by banks that remained undercapitalized even post-OMT. In turn, firms receiving loans used these funds not to undertake real economic activity such as employment and investment but to build up cash reserves. Creditworthy firms in industries with a high zombie firm prevalence suffered significantly from this credit misallocation, which further slowed down the economic recovery

Three essays on bank risk-taking from a portfolio perspective

This dissertation studies three distinct aspects of bank risk-taking from a novel portfolio perspective. First, I provide compelling evidence demonstrating that banks with high industry exposure adeptly adapt loan contract design to prevent potential adverse effects on loan portfolio value arising from the interaction between rival borrowers. Second, I stress the importance of banks’ pre-existing exposure and asset concentration in characterizing the risk-shifting incentives of banks enjoying government guarantees coverage. Last, I show that government guarantees coverage prompts bank risk-shifting at the intensive margin, and induces borrowers to leverage excessively, overinvest, and engage in low-quality projects. Altogether, I highlight the importance of pre-existing exposure in shaping banks’ risk management incentives and its connection to two key issues: the rise in bank concentration and the extent of government guarantees coverage. These findings carry noteworthy implications for bank lending behavior and loan contract design, ultimately impacting borrowers’ corporate policy and potentially giving rise to unintended policy consequences