Macroprudential policy, countercyclical bank capital buffers and credit supply: Evidence from the Spanish dynamic provisioning experiments

We analyze the impact of countercyclical capital buffers held by banks on the supplyof credit to firms and their subsequent performance. Spain introduced dynamicprovisioning unrelated to specific bank loan losses in 2000 and modified its formulaparameters in 2005 and 2008. In each case, individual banks were impacteddifferently. The resultant bank-specific shocks to capital buffers, coupled withcomprehensive bank-, firm-, loan-, and loan application-level data, allow us toidentify its impact on the supply of credit and on real activity. Our estimates showthat countercyclical dynamic provisioning smooths cycles in the supply of credit andin bad times upholds firm financing and performance.

Endogenous credit cycles

I develop an overlapping-generations framework in which changes in lending standards generateendogenous cycles. In my economy, entrepreneurs who are privately informed about thequality of their projects need to borrow funds. Intermediaries screen entrepreneurs both throughthe amount of investment undertaken and through the level of entrepreneurial net worth.I show that endogenous regime switches in financial contracts from pooling to separatingand vice-versa may generate fluctuations even in the absence of exogenous shocks. Whenthe economy is in the pooling (separating) regime, lending standards seem lax ( tight ) andinvestment is high (low). Differently from the existing literature, my model does not requireentrepreneurial net worth to be counter cyclycal or inconsequential for determining aggregateinvestment.

On the impact of leverage constraints on asset prices and trading volume

Researchers have used stylized facts on asset prices and trading volumein stock markets (in particular, the mean reversion of asset returnsand the correlations between trading volume, price changes and pricelevels) to support theories where agents are not rational expected utilitymaximizers. This paper shows that this empirical evidence is in factconsistent with a standard infite horizon perfect information expectedutility economy where some agents face leverage constraints similar tothose found in todays financial markets. In addition, and in sharpcontrast to the theories above, we explain some qualitative differencesthat are observed in the price-volume relation on stock and on futuresmarkets. We consider a continuous-time economy where agents maximize theintegral of their discounted utility from consumption under both budgetand leverage con-straints. Building on the work by Vila and Zariphopoulou(1997), we find a closed form solution, up to a negative constant, for theequilibrium prices and demands in the region of the state space where theconstraint is non-binding. We show that, at the equilibrium, stock holdingsvolatility as well as its ratio to stock price volatility are increasingfunctions of the stock price and interpret this finding in terms of theprice-volume relation.

Boundedly rational credit cycles

We propose an evolutionary model of a credit market. We show that theeconomy exhibits credit cycles. The model predicts dynamics which are consistent with some evidence about the Great Depression. Real shocks triggerepisodes of credit--crunch which are observed in the process of adjustmenttowards the post shock equilibrium.

Interbank liquidity crunch and the firm credit crunch: Evidence from the 2007-2009 crisis

We study the credit supply effects of the unexpected freeze of the Europeaninterbank market, using exhaustive Portuguese loan-level data. We find thatbanks that rely more on interbank borrowing before the crisis decrease theircredit supply more during the crisis. The credit supply reduction is stronger forfirms that are smaller, with weaker banking relationships. Small firms cannotcompensate the credit crunch with other sources of debt. Furthermore, theimpact of illiquidity on the credit crunch is stronger for less solvent banks.Finally, there are no overall positive effects of central bank liquidity, but higherhoarding of liquidity.

Portfolio delegation under short-selling constraints

In this paper we study delegated portfolio management when themanager's ability to short-sell is restricted. Contrary to previousresults, we show that under moral hazard, linear performance-adjustedcontracts do provide portfolio managers with incentives to gatherinformation. The risk-averse manager's optimal effort is an increasingfunction of her share in the portfolio's return. This result affectsthe risk-averse investor's optimal contract decision. The first best,purely risk-sharing contract is proved to be suboptimal. Usingnumerical methods we show that the manager's share in the portfolioreturn is higher than the rst best share. Additionally, this deviationis shown to be: (i) increasing in the manager's risk aversion and (ii)larger for tighter short-selling restrictions. When the constraint isrelaxed the optimal contract converges towards the first best risksharing contract.

Consumer Advisory Bulletin, Credit Cards on Student Incomes: Proceed With Caution – and Shop With Care, Fall 2007

The Attorney General’s Consumer Protection Division receives hundreds of calls and consumer complaints every year. Follow these tips to avoid unexpected expense and disappointments. This record is about: Credit Cards on Student Incomes: Proceed With Caution – and Shop With Care.

Consumer Advisory Bulletin, Bank Credit Card Information, Fall 2003

The Attorney General’s Consumer Protection Division receives hundreds of calls and consumer complaints every year. Follow these tips to avoid unexpected expense and disappointments. This record is about: Bank Credit Card Information

Crises and growth: A re-evaluation

We address the question of whether growth and welfare can be higher in crisis prone economies. First, we show that there is a robust empirical link between per-capita GDP growth and negative skewness of credit growth across countries with active financial markets. That is, countries that have experienced occasional crises have grown on average faster than countries with smooth credit conditions. We then present a two-sector endogenous growth model in which financial crises can occur, and analyze the relationship between financial fragility and growth. The underlying credit market imperfections generateborrowing constraints, bottlenecks and low growth. We show that under certain conditions endogenous real exchange rate risk arises and firms find it optimal to take on credit risk in the form of currency mismatch. Along such a risky path average growth is higher, but self-fulfilling crises occur occasionally. Furthermore, we establish conditions under which the adoption of credit risk is welfare improving and brings the allocation nearer to the Pareto optimal level. The design of the model is motivated by several features of recent crises: credit risk in the form of foreign currency denominated debt; costly crises that generate firesales and widespread bankruptcies; and asymmetric sectorial responses, wherethe nontradables sector falls more than the tradables sector in the wake of crises.

Credit rationing and crowding out during the Industrial Revolution: Evidence from Hoare's Bank, 1702-1862

Crowding-out during the British Industrial Revolution has long been one of the leadingexplanations for slow growth during the Industrial Revolution, but little empirical evidence exists to support it. We argue that examinations of interest rates are fundamentally misguided, and that the eighteenth- and early nineteenth-century private loan market balanced through quantity rationing. Using a unique set of observations on lending volume at a London goldsmith bank, Hoare s, we document the impact of wartime financing on private credit markets. We conclude that there is considerable evidence that government borrowing, especially during wartime, crowded out private credit.

Institutional constraints on organizations: The case of Spanish car dealerships

We study the effect of organizational choice and institutions on the performance ofSpanish car dealerships. Using outlet-level data from 1994, we find that verticallyintegrateddealerships showed substantially lower labor productivity, higher labor costs andlower profitability than franchised ones. Despite these gaps in performance, no verticallyintegratedoutlet was separated until 1994, yet the few outlets that were eventuallyseparated systematically improved their performance. We argue that the conversion ofintegrated outlets into franchised ones involved significant transaction costs, due to aninstitutional environment favoring permanent, highly-unionized employment relations. Inline with this argument, we find that the observed separations occurred in distributionnetworks that underwent marked reductions in worker unionization rates, following thelegalization of temporary labor contracts.

Consumer Advisory Bulletin, More Sources on Students and Credit Card Debt, October 2007

The Attorney General’s Consumer Protection Division receives hundreds of calls and consumer complaints every year. Follow these tips to avoid unexpected expense and disappointments. This record is about: More Sources on Students and Credit Card Debt Suggested by the Office of Attorney General Tom Miller