Research
This page contains my current work and blog posts
Working Papers
Abstract: In frictionless markets, interest rates across various loan products should not differ within borrower, at the same point in time. This paper documents the existence of persistent, loan-level discounts to firms, identified as the difference between spreads on institutional investor-held loans and loans held by banks. Within a loan package -- loans offered to the same firm at the same time -- institutional term loans command a spread 64 basis points above revolving loans and 61 basis points above term loans. We show the discounts are not driven solely by loan characteristics, bid ask spreads, or upward sloping supply curves. Instead we use our measure to test theories of banking relationships and loan pricing. Discounts are higher when no previous banking relationship exists with the borrowing firm, and public borrowers receive higher initial discounts and have steeper declines in the discount over the course of the banking relationship, relative to private borrowers. We propose and provide evidence for a cross-selling model of the pricing of banking services, where banks price services with the impacts on other lines of business in mind. We show that initial discounts are highest to public firms, consistent with greater competition for firms with high likelihood of other banking service needs, and that having previous banking relationships are associated with a greater likelihood of future hiring for all types of banking services.
Vertical Integration in Securitization (with Jose Diego Salas) - Working paper available upon request
Abstract: We study the effects of vertical integration in securitization on loan rates and loan outcomes in the commercial mortgage backed securities (CMBS) market. We find that lenders that are vertically integrated (VI) with the investment bank structuring the CMBS issuance originate loans that have lower interest rates and worse ex-post outcomes, conditional on observables, which is not consistent with standard risk-return considerations. To rationalize the result, we provide a framework that shows that VI lenders exert less screening effort during origination due to their control over the securitization process, leading to lower quality loans in terms of price-risk profile. We provide evidence for the mechanism in our framework and directly test one important implication of greater control of VI lenders, which is shorter time from origination to securitization.
Liberty Street Economics Blog Posts
By many measures nonfinancial corporate debt has been increasing as a share of GDP and assets since 2010. As the May Federal Reserve Financial Stability Report explained, high business debt can be a financial stability risk because heavily indebted corporations may need to cut back spending more sharply when shocks occur. Further, when businesses cannot repay their loans, financial institutions and investors incur losses. In this post, we review measures of corporate leverage in the United States. Although corporate debt has soared, concerns about debt growth are mitigated in part by higher corporate cash flows.
Cited in Bloomberg and ABA Banking Journal
In response to the financial crisis nearly a decade ago, a number of regulations were passed to improve the safety and soundness of the financial system. In this post and our related staff report, we provide a new perspective on the effect of these regulations by estimating the cost of capital for banks over the past two decades. We find that, while banks’ cost of capital soared during the financial crisis, after the passage of the Dodd-Frank Act, banks experienced a greater decrease in their cost of capital than nonbanks and nonbank financial intermediaries.