Lecturer in Finance
Accounting and Finance Group
University of Liverpool Management School
Research Interests: Banking Regulation & Supervision, Banking Theory, and Financial Intermediation

Curriculum Vitae

References

Research

Banking on Resolution: Portfolio Effects of Bail-in vs. Bailout

Job market paper (CEMFI working paper Nr 2410) [Draft]

This paper investigates the impact of supervisory resolution tools-- bail-ins and bailouts-- on banks’ ex-ante portfolio choice and ex-post default probabilities in response to idiosyncratic and systematic shocks. Banks adjust their short-term and long-term risky investments based on anticipated resolution policies. I find that both types of shocks can create financial fragility, which the two resolution tools address differently. Creditor bailouts, i.e., extending deposit insurance coverage, eliminate the equilibrium with bank defaults. On the other hand, bail-ins lead to ex-ante portfolio reallocation: they reduce idiosyncratic risk but increase liquidity risk when both shocks are present, increasing the likelihood of systemic defaults.

presenting at: 13th MoFiR Workshop on Banking, Women in Banking and Finance EFiC Workshop, the 2024 Annual Meeting of the Central Bank Research Association (CEBRA), and 10th IWH-Fin-Fire Workshop on „Challenges to Financial Stability”.

The Effect of Bank Mergers on Lending and Risk-Taking

This paper studies the trade-off between competition and financial stability generated by banking consolidation. I consider an economy with $n \geq 3$ banks where two of them merge for exogenous reasons. I assume that banks monitor borrowers, which lowers their probability of default, and that monitoring is costly and unobservable which creates a moral hazard problem. With insured deposits as the single source of funding, a merger generates higher loan rates, which in turn increases banks' margins and monitoring intensities. Thus, bank consolidation hurts competition, but increases financial stability. Introducing equity capital as an additional source of funding enhances monitoring incentives, due to a ``skin-in-the-game'' effect, which increases lending. This creates a trade-off that results in nontrivial changes in post-merger capital, loan rates, and risk-taking. If loan rates increase following the merger, both the merging bank and its competitors increase their leverage. Higher loan rates and higher leverage exert opposing effects on monitoring intensity and, consequently, on bank risk. Therefore, advocating banking consolidation as a means of achieving financial stability is no longer evident.

Banking Supervision and Bank Risk-Taking

joint with Rafael Repullo

This paper presents a theoretical analysis of the effects of banking supervision on bank risk-taking. The model features a risk-neutral bank that raises one unit of insured deposits and invests them in a large portfolio of loans with a random return. The bank chooses the correlation in loan defaults, ranging from independent to perfectly correlated defaults. Meanwhile, the supervisor receives an imprecise signal regarding the proportion of loan defaults and intervenes by closing the bank early when the signal exceeds a threshold. The question is: will this combination of supervisory information and supervisory closure reduce risk-taking? The paper shows that a strict supervisor or a noisy signal reduces portfolio risk. Moreover, a supervisor aiming to close the bank when it is efficient to do so becomes more lenient when the signal noise increases.

Teaching

Teaching Assistant at CEMFI:

• Financial Economics, Enrique Sentana
  Spring 2023
• Economics of Banking, Javier Suarez
  Fall 2021
• Asset Pricing, Enrique Sentana
  Spring 2021