134 research outputs found
When Safe Proved Risky: Commercial Paper During the Financial Crisis of 2007-2009
No full textCommercial paper is one of the largest money market instruments and has long been viewed as a safe haven for investors seeking low risk. However, during the financial crisis of 2007-2009, the commercial paper market experienced twice the modern-day equivalent of a bank run with investors unwilling to refinance maturing commercial paper. We analyze the supply of and demand for commercial paper and show that, in contrast to previous turbulent episodes, the crisis centered on commercial paper issued by, or guaranteed by, financial institutions. We describe the importance of Federal Reserve’s interventions in restoring stability of the market. Finally, we propose three possible explanations for the sharp decline of the commercial paper market: substitution to alternative sources of financing by commercial paper issuers, adverse selection, and institutional constraints among money market funds.
Replication Data for The Rise of Finance Companies and FinTech Lenders in Small Business Lending
No full textStata code and non-proprietary data to replicate results in Gopal and Schnabl (2022
Securitization without risk transfer
No full textWe analyze asset-backed commercial paper conduits which played a central role in the early phase of the financial crisis of 2007-09. We document that commercial banks set up conduits to securitize assets while insuring the newly securitized assets using credit guarantees. The credit guarantees were structured to reduce bank capital requirements, while providing recourse to bank balance sheets for outside investors. Consistent with such recourse, we find that banks with more exposure to conduits had lower stock returns at the start of the financial crisis; that during the first year of the crisis, asset-backed commercial paper spreads increased and issuance fell, especially for conduits with weaker credit guarantees and riskier banks; and that losses from conduits mostly remained with banks rather than outside investors. These results suggest that banks used this form of securitization to concentrate, rather than disperse, financial risks in the banking sector while reducing their capital requirements.
Implicit Guarantees and Risk Taking: Evidence from Money Market Funds
No full textA firm's termination generates bankruptcy costs. This may create incentives for a firm's owner to bail out a firm in bankruptcy and to curb the firm's risk taking outside bankruptcy. We analyze the role of such implicit guarantees in the context of financial institutions that sponsor money market mutual funds. Our identification strategy exploits a large, exogenous expansion in risk-taking opportunities of money market funds during the period of August 2007 to August 2008. We find that a fund's response to the expansion depends on its sponsor's ability to provide implicit guarantees: Funds sponsored by financial institutions with higher equity take on less risk than those sponsored by financial institutions with lower equity. Moreover, fund sponsors with higher equity are more likely to provide financial support to their funds during a market-wide run in September 2008. The difference in risk taking disappears once implicit guarantees by fund sponsors are replaced with an explicit government guarantee. Overall, our findings suggest that implicit guarantees may reduce, rather than increase, risk taking.
Replication Data for: "The Deposits Channel of Monetary Policy"
No full textThe data and programs replicate tables and figures from "The Deposits Channel of Monetary Policy", by Drechsler, Savov, and Schnabl. Please see the Readme file for additional details
Replication Data for: "The Deposits Channel of Monetary Policy"
No full textThe data and programs replicate tables and figures from "The Deposits Channel of Monetary Policy", by Drechsler, Savov, and Schnabl. Please see the Readme file for additional details
A Pyrrhic Victory? - Bank Bailouts and Sovereign Credit Risk
No full textWe show that financial sector bailouts and sovereign credit risk are intimately linked. A bailout benefits the economy by ameliorating the under-investment problem of the financial sector. However, increasing taxation of the non-financial sector to fund the bailout may be inefficient since it weakens its incentive to invest, decreasing growth. Instead, the sovereign may choose to fund the bailout by diluting existing government bondholders, resulting in a deterioration of the sovereign's creditworthiness. This deterioration feeds back onto the financial sector, reducing the value of its guarantees and existing bond holdings and increasing its sensitivity to future sovereign shocks. We provide empirical evidence for this two-way feedback between financial and sovereign credit risk using data on the credit default swaps (CDS) of the Eurozone countries for 2007-10. We show that the announcement of financial sector bailouts was associated with an immediate, unprecedented widening of sovereign CDS spreads and narrowing of bank CDS spreads; however, post-bailouts there emerged a significant co-movement between bank CDS and sovereign CDS, even after controlling for banks' equity performance, the latter being consistent with an effect of the quality of sovereign guarantees on bank credit risk.
A Model of Shadow Banking
No full textWe present a model of shadow banking in which financial intermediaries originate and trade loans, assemble these loans into diversified portfolios, and then finance these portfolios externally with riskless debt. In this model: i) outside investor wealth drives the demand for riskless debt and indirectly for securitization, ii) intermediary assets and leverage move together as in Adrian and Shin (2010), and iii) intermediaries increase their exposure to systematic risk as they reduce their idiosyncratic risk through diversification, as in Acharya, Schnabl, and Suarez (2010). Under rational expectations, the shadow banking system is stable and improves welfare. When investors and intermediaries neglect tail risks, however, the expansion of risky lending and the concentration of risks in the intermediaries create financial fragility and fluctuations in liquidity over time.
Dissecting the Effect of Credit Supply on Trade: Evidence from Matched Credit-Export Data
No full textWe estimate the elasticity of exports to credit using matched customs and firm-level bank credit data from Peru. To account for non-credit determinants of exports, we compare changes in exports of the same product and to the same destination by firms borrowing from banks differentially affected by capital-flow reversals during the 2008 financial crisis. We find that credit shocks affect the intensive margin of exports, but have no significant impact on entry or exit of firms to new product and destination markets. Our results suggest that credit shortages reduce exports through raising the variable cost of production, rather than the cost of financing sunk entry investments.
COST Workshop on Firm-Level Data Analysis in Transition and Developing Economies
No full textAbstract We provide evidence on the real effects of credit supply shocks utilizing a new firm-level database from six Latin American countries between 1990 to 2005. Holding creditworthiness constant through foreign currency debt exposure, we compare investment undertaken by domestic exporters to that of foreign-owned exporters, where the latter's exposure to the liquidity shock is lower. We find that foreign-owned exporters increase investment by 15 percentage points relative to domestic exporters only when the currency crisis occurs simultaneously with a banking crisis. These findings suggest that the key factor hindering investment during financial crises is the decline in credit supply. JEL Classification: E32, F15, F36, O16 Keywords: foreign ownership, twin crisis, exports, short-term dollar debt, bank lending, growth * Corresponding author: Sebnem email: [email protected],. We thank Laura Alfaro, Hoyt Bleakley, Roberto Chang, Fritz Foley, Mario Crucini, Aimee Chin, Philipp Schnabl and Bent Sorensen for valuable suggestions and the participants of the seminar at Alicante
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