Revise & Resubmit
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Regulatory Arbitrage within the Firm
R&RJournal of Financial Economics
Regulation often applies asymmetrically across the legally distinct entities within a firm. We study the consequences in U.S. bank holding companies, where regulated banks coexist with more lightly-regulated nonbanks. Exploiting Basel III and predetermined variation in organizational complexity, we show firms meet tighter bank capital requirements by reallocating equity from nonbank subsidiaries rather than raising new capital, leaving consolidated capital unchanged. Banks become better capitalized and safer, while nonbanks become more thinly capitalized, shift toward riskier lending, and grow more fragile. Stress tests show organizational contagion erodes these gains in bank safety and can reverse them for the most exposed institutions.
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The Economics of Network-Based Deposit Insurance
R&RReview of Financial Studies
We examine the financial stability implications of deposit insurance using reciprocal deposits, a financial innovation through which banks can break up large deposits and place them with others in an offsetting manner. We show that higher insurance coverage allowed banks to stem deposit outflows during the 2023 banking crisis. Network banks paid lower deposit rates, grew larger, and expanded their local deposit market share, while assuming greater risk exposures. We discuss the trade-offs of deposit insurance and its impact on the banking sector's industrial organization.
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When Privacy Protects but Excludes: The Costs and Benefits of Privacy Regulation in Credit Markets
R&RReview of Financial Studies
This paper studies the consequences of privacy regulation by exploiting Google's 2019 data-access restriction. We document a key trade-off: stronger privacy protections increase loan applications, suggesting higher demand, but lead to tighter screening and reduced credit supply. This contraction disproportionately excludes economically and socially marginalized applicants. Using bureau records, we quantify the “FinTech ladder effect,” whereby early digital credit access enables long-term borrowing. Privacy-driven rejections lower the likelihood of obtaining credit by 13.7 percentage-points even after four years. A structural model decomposes the welfare effects and shows that regulation raises consumer surplus by 0.23–0.60% but reduces lender profits by 20–23%.
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Deposit Rates as Regional Economic Indicators
R&RJournal of Monetary Economics
This paper shows that local bank deposit rates are strong predictors of local economic downturns, outperforming deposit growth, credit growth, and standard leading indicators such as auto sales, unemployment claims, and job openings. A one standard deviation increase in county deposit rates predicts a 1.35 percentage point decline in GDP growth three years ahead and delivers an AUC of 0.73 in forecasting local recessions. We argue that deposit rates outperform quantity-based measures because, as equilibrium prices, they embed forward-looking information about the marginal cost of bank funding that quantities do not fully capture. Consistent with a funding-conditions channel, counties exposed to the 2018 Wells Fargo regulatory enforcement experienced deposit outflows, rising deposit rates, contractions in small-business lending, and slower GDP growth. Bank-level evidence further shows that the largest rate increases occur at banks with stretched credit-to-deposit ratios and low cash holdings, rather than at banks with weaker capital or higher non-performing loans. Together, these results establish deposit rates as a timely, granular, and publicly observable indicator of regional economic risk.
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Monitoring with Small Stakes
R&RManagement Science
This paper addresses the “monitoring with small stakes” phenomenon in leveraged lending. We theoretically identify two primary sources of creditor monitoring incentives: skin in the game and rent extraction through renegotiation. Rent extraction via renegotiation acts as a substitute for banks' loan stakes. To empirically validate this mechanism, we leverage the passage of a tax policy that exogenously reduced renegotiation costs. Our findings suggest that a less frictional renegotiation environment fosters more diligent monitoring, particularly in loans with concentrated control rights. This enhanced monitoring improves borrower performance, especially in deals with concentrated control rights and lower bank shares.
Publications
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Covenant-Driven Fire Sales
ForthcomingAmerican Economic Journal: Macroeconomics
Covenants mitigate agency frictions but can trigger asset sales at fire sale prices. I demonstrate covenant-driven fire sales and trace their real effects. Following a large negative oil-price shock, collateralized loan obligations exposed to oil-and-gas (O&G) firms approach their covenant thresholds and sell non-O&G loans, exerting price-pressure on non-O&G bonds and loans in primary and secondary markets. Affected non-O&G borrowers experience declines in financing, investment, R&D, and employment. Instrumenting CLO net loan sales with lenders' O&G exposure, a one-percentage-point increase reduces firm investment by 0.08 percentage-points, 5% of mean investment. Covenant-induced liquidations can thus generate credit crunches via capital-market contagion.
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Banking Networks and Economic Growth: From Idiosyncratic Shocks to Aggregate Fluctuations
PublishedAmerican Economic Journal: Macroeconomics, 2026, 18(2): 332–377
This paper investigates the role of banking networks in the transmission of shocks across borders. Combining banking deregulation in the United States with state-level idiosyncratic demand shocks, we show that geographically diversified banks reallocate funds from economies experiencing negative shocks to unaffected regions. Our findings indicate that in the presence of idiosyncratic shocks, financial integration reduces business cycle comovement and synchronizes consumption patterns. Our findings contribute to explaining the Great Moderation and provide empirical support for theories that predict that banking integration facilitates the insurance of region-specific risk and the efficient allocation of resources as markets become more complete.
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Financial Covenants and Fire Sales in Closed-End Funds
PublishedManagement Science, 2024, 70(2): 860–884
Closed-end funds are thought to have negligible fire sale risk as they have stable funding. However, I show that embedded covenants can generate price pressure in collateralized loan obligation (CLO) funds, even though such funds are closed end. Loans held by constrained CLOs report significantly lower cumulative returns than loans held by unconstrained CLOs. This can be explained by contractual arbitrage, a practice by which CLOs exploit loopholes in the design of covenants to mechanically loosen their covenants and avoid covenant breaches. Covenant breaches are associated with significant pecuniary and nonpecuniary costs, affecting CLO compensation, reputation, and career prospects. I show that when covenants breaches are imminent, managers fire sell distressed loans. Hence, I demonstrate a channel by which closed-end funds can also create fire sale risk, akin to their open-end counterparts.
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The Anatomy of Corporate Securitizations and Contract Design
PublishedJournal of Corporate Finance, 2023, 81: 102195
Collateralized loan obligations (CLOs), intermediaries situated between investors and traditional banks, play an increasingly central role in the provision of credit to constrained corporations, holding as much as 75% of all new institutional leveraged loans. Despite their ascendancy in the risky corporate credit market, there has been little academic research on the CLO market. This paper provides a comprehensive overview of the design and structure of the CLO market, describing the general macroeconomic milieu that has facilitated the rapid growth of the market, the mechanics therein, as well as recent risks that have emerged. Understanding the anatomy and dynamics of CLOs is paramount for developing insights into the role of non-bank financial intermediaries in financial markets.
Working Papers
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How Do Government Guarantees Affect Deposit Supply? New
The market value of deposit insurance changes over time and across banks as the value of the underlying put option changes, but the premium banks pay for the insurance does not adjust to completely capture this variation. Consequently, their incentive to supply insured deposits changes with the subsidy they enjoy from deposit insurance. Factors that increase the subsidy, such as asset risk, move the supply curve outward. Consistent with this idea, we show that the supply of insured deposits increases when banks become riskier. Our findings uncover a novel channel of deposit supply, with implications for existing research on the deposits channel of monetary policy.
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The Regional and the Aggregate Effects of Bank Funding Shocks New
How large is the aggregate effect of bank credit supply on economic growth, and how much of it can cross-sectional estimates recover? We construct granular bank funding shocks by interacting local disasters with banks' geographically concentrated deposit bases. Using the same variation, we estimate a regional credit-supply elasticity of 0.088 and measure the aggregate lending and output responses. The regional loan-quantity channel explains only 9% of the aggregate output response. The remaining 91% captures aggregate adjustment outside the channel identified by regional variation. Our results suggest that well-identified regional credit-supply estimates may capture only a small share of the aggregate response.
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When Funding Markets Move Credit Markets: Foreign Investors and U.S. CLOs New
We show that U.S. leveraged credit and global dollar funding markets are linked through Japanese banks, which hold roughly one-quarter of U.S. CLO AAA tranches. The JPY–USD cross-currency basis, which measures the cost of synthetic dollar funding, strongly predicts AAA spreads and issuance, a relationship absent in comparable safe assets. Importantly, basis pass-through strengthened after Japanese banks' CLO market share declined around 2019, showing that foreign ownership alone does not determine cross-market transmission. We develop a two-market equilibrium model in which pass-through depends on the aggregate demand elasticity of Japanese banks. We test this mechanism using Japan's 2019 Basel III securitization rules, the Bank of Japan's 2023–2024 policy normalization, and quarter-end balance-sheet reporting cycles. Shocks that increase demand elasticity amplify basis pass-through, while shocks that decrease it dampen pass-through. These shocks therefore tilt, rather than merely shift, demand. Our results show that domestic credit markets' exposure to external funding shocks depends not only on foreign participation, but on the elasticity of foreign demand.
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Valuing Sticky Deposits New
We develop a formal fixed-income framework to value sticky deposits. This framework provides closed-form expressions for deposit values and allows us to study the impact of stickiness on deposit interest-rate and runoff risks. The duration of a bank deposit can be either positive or negative, which has important implications for hedging the interest-rate risk of bank balance sheets. Banks that maximize deposit value by following optimal deposit beta strategies may significantly increase their interest-rate and deposit runoff risks. We test the empirical implications of the valuation model using market deposit premia observed in bank merger and acquisition transactions. The results provide strong empirical support for the model's predictions.
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Credit Cycles and Creditor Rights New
Do creditor rights amplify or dampen economic fluctuations? Using a panel of 39 countries from 1978 to 2019, we show that credit expansions in economies with strong creditor protection are followed by smaller output losses, fewer non-performing loans, and a greater reallocation of credit away from unproductive sectors. Firm-level evidence from Delaware's adoption of antirecharacterization laws shows that well-protected creditors cut credit to low-productivity firms while easing borrowing constraints for productive ones. Overall, our findings indicate that stronger creditor rights dampen the output losses of credit booms by facilitating a more efficient reallocation of capital.
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Diverging Banking Sector: New Facts and Macro Implications
We document the emergence of two distinct types of banks over the past decade: high-rate banks, which set deposit rates to match market rates, hold shorter-term assets, and earn spreads through higher credit risk in personal and business loans; and low-rate banks, which offer low, stable deposit rates, hold longer-term assets like MBS, and lend less to firms. This divergence shifts deposits toward high-rate banks during monetary tightening, reducing the sector's capacity to finance long-term assets like mortgages while concentrating credit risk among high-rate banks. Technology appears to be a key driver: high-rate banks operate primarily online and attract rate-sensitive, less-sticky depositors.
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The Geography of Corporate Investment: Role of History Beyond Institutions
This paper shows that colonial rule shaped contemporary spatial patterns of private investment through industrial disruption and its effects on human capital. Using variation between direct and indirect British rule in India, a border district–pair design, and an IV based on ruler succession, we find investment is 8–11% lower in historically direct-ruled districts. The British disproportionately annexed cotton-producing regions, dismantling local textile industries. Using adoption of Whitney cotton gin as an exogenous shift in incentives to suppress Indian textiles, we show earlier annexations caused greater industrial disruption, weaker transmission of industry skills, and persistent investment gaps, especially among labor-intensive firms.
Book Chapters & Policy Articles
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Stablecoins in the USA: Politics, Markets, and Rules
Book chapterIn Stablecoins: Making Money for the Digital Age, Edinburgh University Press, 2026
We examine how stablecoins moved from the periphery of cryptocurrency markets and regulatory scrutiny to becoming the centerpiece of strongly bipartisan U.S. legislation. We argue that stablecoins became politically viable because they were increasingly understood as instruments of U.S. monetary strategy: privately issued digital dollars that could reinforce, rather than undermine, dollar dominance if brought within a federal regulatory framework. The case for federal regulation was therefore both prudential and strategic. Regulation offered a way to make private-dollar innovation serve public monetary power. To build support for this claim, we analyze the institutions, ideas, and interests that shaped the GENIUS Act. First, we highlight how the President's Working Group reframed stablecoins as a prudential and payments problem compatible with existing institutional arrangements. Second, we trace the ideas that shaped the legislation, including stablecoins as a private-money problem, a payments innovation, an instrument of dollar statecraft, and a politically viable alternative to central bank digital currencies. While these ideas were not always harmonious, together they pushed policy toward allowing regulated, privately issued payment stablecoins. Third, we examine how interest groups reshaped both the debate and the framing of legislation. We conclude by assessing the GENIUS Act's achievements and examining the questions it leaves unanswered.
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Capitalizing on Nonbanks: Regulatory Arbitrage Within Bank Holding Companies
PolicyLiberty Street Economics, Federal Reserve Bank of New York, July 15, 2026
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How Basel III Changes Where Capital Sits: Nonbank Subsidiaries as Equity Reservoirs
PolicyLiberty Street Economics, Federal Reserve Bank of New York, July 16, 2026
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Nonbank Subsidiaries and the Hidden Fragility of Internal Capital Markets Reallocation
PolicyLiberty Street Economics, Federal Reserve Bank of New York, July 17, 2026