The Journal of Finance

The International Transmission of Bank Liquidity Shocks: Evidence from an Emerging Market

Published: 05/21/2012   |   DOI: 10.1111/j.1540-6261.2012.01737.x

PHILIPP SCHNABL

I exploit the 1998 Russian default as a negative liquidity shock to international banks and analyze its transmission to Peru. I find that after the shock international banks reduce bank‐to‐bank lending to Peruvian banks and Peruvian banks reduce lending to Peruvian firms. The effect is strongest for domestically owned banks that borrow internationally, intermediate for foreign‐owned banks, and weakest for locally funded banks. I control for credit demand by examining firms that borrow from several banks. These results suggest that international banks transmit liquidity shocks across countries and that negative liquidity shocks reduce bank lending in affected countries.

Efficient Recapitalization

Published: 12/27/2012   |   DOI: 10.1111/j.1540-6261.2012.01793.x

THOMAS PHILIPPON, PHILIPP SCHNABL

We analyze government interventions to recapitalize a banking sector that restricts lending to firms because of debt overhang. We find that the efficient recapitalization program injects capital against preferred stock plus warrants and conditions implementation on sufficient bank participation. Preferred stock plus warrants reduces opportunistic participation by banks that do not require recapitalization, although conditional implementation limits free riding by banks that benefit from lower credit risk because of other banks’ participation. Efficient recapitalization is profitable if the benefits of lower aggregate credit risk exceed the cost of implicit transfers to bank debt holders.

Banking on Deposits: Maturity Transformation without Interest Rate Risk

Published: 02/15/2021   |   DOI: 10.1111/jofi.13013

ITAMAR DRECHSLER, ALEXI SAVOV, PHILIPP SCHNABL

We show that maturity transformation does not expose banks to interest rate risk—it hedges it. The reason is the deposit franchise, which allows banks to pay deposit rates that are low and insensitive to market interest rates. Hedging the deposit franchise requires banks to earn income that is also insensitive, that is, to lend long term at fixed rates. As predicted by this theory, we show that banks closely match the interest rate sensitivities of their interest income and expense, and that this insulates their equity from interest rate shocks. Our results explain why banks supply long‐term credit.

Specialization in Bank Lending: Evidence from Exporting Firms

Published: 06/20/2023   |   DOI: 10.1111/jofi.13254

DANIEL PARAVISINI, VERONICA RAPPOPORT, PHILIPP SCHNABL

We develop a novel approach for measuring bank specialization using granular data on borrower activities and apply it to Peruvian exporters and their banks. We find that borrowers seek credit from banks that specialize in their export destinations, both when expanding exports and when exporting to new countries. Firms experiencing country‐specific export demand shocks adjust borrowing disproportionately from specialized banks. Specialized bank credit supply shocks affect exports disproportionately to countries of specialization. Our results demonstrate that firm credit demand is bank‐ and activity‐specific, which reduces banking competition and affects the transmission and amplification of shocks through the banking sector.

A Pyrrhic Victory? Bank Bailouts and Sovereign Credit Risk

Published: 08/11/2014   |   DOI: 10.1111/jofi.12206

VIRAL ACHARYA, ITAMAR DRECHSLER, PHILIPP SCHNABL

We model a loop between sovereign and bank credit risk. A distressed financial sector induces government bailouts, whose cost increases sovereign credit risk. Increased sovereign credit risk in turn weakens the financial sector by eroding the value of its government guarantees and bond holdings. Using credit default swap (CDS) rates on European sovereigns and banks, we show that bailouts triggered the rise of sovereign credit risk in 2008. We document that post‐bailout changes in sovereign CDS explain changes in bank CDS even after controlling for aggregate and bank‐level determinants of credit spreads, confirming the sovereign‐bank loop.

A Model of Monetary Policy and Risk Premia

Published: 06/22/2017   |   DOI: 10.1111/jofi.12539

ITAMAR DRECHSLER, ALEXI SAVOV, PHILIPP SCHNABL

We develop a dynamic asset pricing model in which monetary policy affects the risk premium component of the cost of capital. Risk‐tolerant agents (banks) borrow from risk‐averse agents (i.e., take deposits) to fund levered investments. Leverage exposes banks to funding risk, which they insure by holding liquidity buffers. By changing the nominal rate the central bank influences the liquidity premium, and hence the cost of taking leverage. Lower nominal rates make liquidity cheaper and raise leverage, resulting in lower risk premia and higher asset prices, volatility, investment, and growth. We analyze forward guidance, a “Greenspan put,” and the yield curve.

Who Borrows from the Lender of Last Resort?

Published: 05/23/2016   |   DOI: 10.1111/jofi.12421

ITAMAR DRECHSLER, THOMAS DRECHSEL, DAVID MARQUES‐IBANEZ, PHILIPP SCHNABL

We analyze lender of last resort (LOLR) lending during the European sovereign debt crisis. Using a novel data set on all central bank lending and collateral, we show that weakly capitalized banks took out more LOLR loans and used riskier collateral than strongly capitalized banks. We also find that weakly capitalized banks used LOLR loans to buy risky assets such as distressed sovereign debt. This resulted in a reallocation of risky assets from strongly to weakly capitalized banks. Our findings cannot be explained by classical LOLR theory. Rather, they point to risk taking by banks, both independently and with the encouragement of governments, and highlight the benefit of unifying LOLR lending and bank supervision.