Credit Supply and the Macroeconomy

The policy response to the recent financial crisis has broadly focused on two themes: 1) Increasing the banking sectorsâ resilience to future financial shocks: 2) Improving credit availability to households and firms via lowering both short and long-term interest rates and thereby affecting short-term output and inflation. This dissertation studies how banks and firms have responded to these policy measures. The dissertation comprises of three chapters. The first two analyze the impact of capital regulation on bank lending for two different jurisdictions - United States and Switzerland. The third evaluates the response of U.S. non-financial firms to lower interest rates. The first chapter is joint work with Luisa Lambertini. We estimate the impact of bank capital regulation on lending spreads. We use U.S. firm-level data on syndicated loans matched with Bank Holding Company (BHC) data for the lending banks in our panel regressions. We find that higher bank capital leads to an increase in the loan pricing. Further, we investigate if stress test failure under the Supervisory Capital Assessment Program and Comprehensive Capital Analysis and Review leads to higher loan spreads, since financial institutions that failed were required to raise capital in the short run. Using a difference-in-difference framework, we find: 1) BHCs that failed the stress tests increased their loan pricing; 2) Loan pricing is higher for all banks after the commencement of the stress tests. These findings suggest that greater regulatory oversight and higher capital requirements have made syndicated loans more costly for firms. The second chapter is joint work with Luisa Lambertini, Dan Wunderli and Robert Bichsel. We use confidential loan-by-loan data of Swiss banks to study the impact of higher capital requirements on lending. Our data allows us to trace the link between bank capital and new credit granted at the bank level. Additionally bank-specific variation of capital targets allows us to analyze how deviation from the regulatory capital target impacts loan pricing and volume. We find that tighter capital regulation has small but statistically significant short-term effects on loan pricing and growth. We do not find a permanent effect of higher capital ratios on loan growth. In the third chapter, I study the behavior of U.S. non-financial corporates after the recent financial crisis. I document an increase in the real debt holdings and correspondingly the book leverage for these firms. Controlling for firm and time fixed-effects, I find a higher long-term debt to asset ratio to be associated with lower capital expenditures and growth in fixed capital post-crisis. This is also true for financially unconstrained firms, as determined by the Whited-Wu index, vis-a-vis pre-crisis. Moreover, firms with a higher share of long-term debt after the crisis appear to have a greater likelihood of repurchasing shares and larger dollar payouts to equity holders. The evidence points to the fact that any increase in long-term debt has had an impact on firms' capital structure but no positive effect on real investment.

Essays in Financial Economics

Christoph Helmut Peter Herpfer

This thesis contains four chapters, each of which utilizes new or unusual data sources to analyze a different area of financial economics. In the first chapter, I construct a novel dataset linking individual bankers to large borrowers in the U.S. syndicated loan market to analyze the impact of bankers on bank lending. I find that time invariant banker fixed effects have at least as much explanatory power as bank fixed effects across key loan outcome variables. One channel through which bankers impact lending is through personal relationships with borrowers. I address the endogenous nature of relationship formation by exploiting shocks to relationships from the departure of bankers and find that stronger personal relationships are associated with significantly lower interest rates charged to clients. Reduced interest rates of relationship loans reflect superior information of bankers, rather than nepotism. Loans issued by bankers that have stronger personal relationships with borrowers are associated with fewer bankruptcies and no more beneficial terms upon renegotiation. The second chapter, which is joint work with Stefano Colonnello, exploits a U.S. Supreme Court ruling on diversity of citizenship in legal disputes to estimate the contribution of the court system to firm value. In an event study, we find that an increase in state court quality from bottom to top tercile is associated with an average increase in equity value of 0.45%, or about $8.7 million on the event day. This effect appears to be driven by courts¿ attitude towards businesses more than by their competency and is more pronounced for firms in industries with high litigation risk. We also test whether firms benefit from the ability to steer lawsuits into friendly courts, so called forum shopping. We provide evidence that a reduction in firms¿ ability to forum shop decreases firm value, whereas a reduction in plaintiffs¿ ability to forum shop increases firm value. We further document that the ruling had significant real effects. Firms which previously stayed out of regions with potentially problematic courts subsequently increased their operations in those regions. The third chapter is coauthored with Matthias Effing, Rüdiger Fahlenbrach, and Philipp Krüger and examines the impact of a sudden home currency appreciation on the valuation and behavior of corporations in a developed economy. The Swiss National Bank surprisingly repealed the minimum exchange rate of 1.2 Swiss francs per Euro on January 15, 2015. On that day the franc appreciated by 15% and the main stock market index dropped by 8.7%. The impact was largest for export oriented firms with high domestic costs. These firms experienced 5% lower announcement returns, subsequently faced economically sizeable reductions in sales and profitability, and responded by reducing investment by 8.1% while only slightly reducing employment. In the fourth chapter, which is joint work with Cornelius Schmidt and Aksel Mjøs, we exploit exogenous shocks to the distance between corporate borrowers and banks to analyze the role of distance in commercial bank lending. We find that a reduction in travel time due to improved infrastructure increases the likelihood of initiating a new borrowing relationship, evidence that closer distance creates a surplus from lower transaction costs. In existing lending relationships, however, banks capture a fraction of this surplus by increasing interest rates.

EPFL2017

Stress tests and loan pricing—Evidence from syndicated loans

Luisa Lambertini, Abhik Mukherjee

This paper estimates the impact of stress-testing on lending spreads. We use firm-level data onsyndicated loans matched with bank holding company (BHC) data in our panel regressions.Using a difference-in-difference framework, we find: (1) BHCs that failed the stress testsincreased their loan pricing; (2) Loan pricing is higher for all BHCs after the commencementof the stress tests. These findings suggest that stress-test failure leads to higher spreads in thesyndicated loan market after the great financial crisis.

2021

Essays on Mortgage Supply in a Low Rate Environment and Gender Effects of Covid-19

Yu Wu

After the financial crisis, policy rates in the major advanced economies have moved downwards to near/below zero. Some countries have experienced an increase in house prices and an expansion of mortgages. Also, there have been considerable changes in the mortgage market share, with only a few bank categories contributing to this mortgage expansion. Such change in exposure to real estate risk may pose a risk to financial stability. My dissertation research studies the role played by specific bank features, such as reliance on deposits and covered bonds or capital surplus relative to the required level, in explaining banks' different mortgage lending behavior. The first chapter (joint with Prof. Luisa Lambertini) studies the Swiss mortgage market dynamics in a low rate environment. After 2008, small banks (cantonal banks and Raiffeisen) have primarily contributed to this mortgage expansion at the expense of two big global systemic banks (UBS and Credit Suisse). We set up a model featuring big and small banks that compete in the deposit and mortgage market and face different capital requirements. We calibrate it to the Swiss banking sector. In this model, a falling policy rate drives up borrowing demand and leads to an expansion in mortgage supply; however, an asymmetric tightening of capital requirement gives small banks a competitive advantage and causes a shift in market share towards small banks. In the second chapter, with Prof. Luisa Lambertini, we use the Swedish bank-level data and employ a triple diff strategy to investigate whether funding side differences also play a role in explaining banks' different lending responses to the negative rate policy. First, we find that high-deposit banks expand their mortgage supply less than low-deposit banks during negative rate periods, confirming the well-documented deposit channel effect. However, this pattern works only for weakly-capitalized banks, which have a low capital buffer. Second, we show that banks more reliant on covered bonds to finance mortgage lending lend out more under negative rates; they can shift into cheap deposits to reduce their funding costs. We extend our model in the first chapter to be consistent with these empirical findings and use it to study the implications of the Covid-19 pandemic for the mortgage market. The third chapter analyzes the transmission of housing price dynamics to the real economy in the context of China, which went through a decade-long housing boom. Understanding its propagation to other economic activities is thus important. I build up a real business cycle model for this study and find that land-use conversion by the governments and land finance of housing firms can amplify the crowding-out effects of housing price fluctuations on the non-housing sector. The year 2020 was marked by the outbreak of the Covid-19 pandemic, which adversely affected the labor market. The fourth chapter is an additional line of work, with Dr. Corinne Dubois and Prof. Luisa Lambertini exploring gendered consequences of the pandemic in the Swiss labor market. We use the Swiss labor force survey data and find that all else equal, women have been more likely to exit the labor market altogether or to use short-term working schemes than their male counterparts. Contrary to expectations, increased family-care responsibility is not the main driver. Telework availability of occupation, however, explains some of the differential impact of Covid-19 on men and women.