Working Papers
This paper develops a theory to study the effect of low interest rates on bank stability. While low rates reduce bank profits by compressing interest margins, they also boost the value of banks’ long-term assets. The paper's main result is the characterization of a critical interest-rate level. Below this tipping point, the compression of interest margins dominates the revaluation of long-term assets, leading to insolvency and a banking crisis. The tipping point depends on observable bank characteristics. In a quantitative analysis, I find a value of 0.32% for the US economy in the decade before the Global Financial Crisis.
Under reviewPaper
Liquidity regulation is the conventional policy deployed to correct insufficient liquid-asset holdings by banks. In a standard banking model in which under laissez faire banks hold excessively illiquid asset porfolios, I find that payment of interest on reserves, by strengthening banks’ incentive to hold liquid assets, equivalently corrects this distortion. In fact, it is the optimal policy intervention, since it does not act as a tax on banks and thus, unlike liquidity regulation, avoids financial disintermediation. In an extension, I show that payment of interest on reserves has a fiscal cost and therefore distortionary taxation implies a lower optimal level of interest on reserves.
with A. Leonello, C. Mendicino and E. Panetti| Under reviewPaper
Does the level of deposits matter for bank fragility and efficiency? In a banking model with endogenous bank runs and a consumption-saving decision, we show that the level of deposits has opposite effects on bank fragility depending on the nature of bank runs. In an economy with panic-driven runs, higher deposits make banks less fragile, while the opposite is true when runs are only driven by fundamentals. The effect of deposits is not internalized by depositors. A saving externality arises, leading to excessive fragility and insufficient liquidity provision. The economy features undersaving when runs are panic driven, and over-saving when fundamental driven.