Contagious Bank Runs and Committed Liquidity Support, with Kebin Ma (WBS), accepted at Management Science In a crisis, regulators and private investors can find it difficult, if not impossible, to tell whether banks facing runs are insolvent or merely illiquid. We introduce such an information constraint into a global-games-based bank run model with multiple banks and aggregate uncertainties. The information constraint creates a vicious cycle between contagious bank runs and falling asset prices and limits the effectiveness of traditional emergency liquidity assistance programs. We explain how a regulator can set up committed liquidity support to contain contagion and stabilize asset prices even without information on banks' solvency, rationalizing some recent developments in policy practices. A Tale of Two Markets: Labor Market Mobility and Bank Information Sharing, with Yinxiao Chu (UIBE), Jianxing Wei (UIBE) and Weixing Wu (UIBE), Journal of Economic Dynamics and Control, 141 (2022), 104381 We develop a theory of bank information sharing, highlighting the interactions between credit and labor markets. A better-informed relationship bank competes with a less informed foreign bank for borrowers under asymmetric information about borrowers' creditworthiness. Credit market competition triggers competition for the relationship bank's loan officers, who possess valuable information about the borrowers' creditworthiness. The relationship bank can share credit information to soften the labor market competition, despite intensifying the credit market competition. When labor market mobility is moderate, information sharing emerges as the optimal strategy of the relationship bank.
Optimal Loan Contracting under Policy Uncertainty: Theory and International Evidence, with Di Gong (UIBE), Tao Jiang (PBC) and Weixing Wu (UIBE), Journal of International Financial Markets, Institutions and Money, 77 (2022), 101502 This paper provides comprehensive theoretical and empirical analyses on bank lending under macro-policy uncertainty. Our theory differentiates uncertainty from risk and endo- genizes banks’ loan contracting under uncertainty. We show that banks demand a higher loan rate and grant a smaller loan size when uncertainty increases. To test our theoretical predictions, we construct a cross-country sample of syndicated loan contracts in 18 major economies over 2000-2015 and proxy the policy uncertainty with the Economic Policy Un- certainty (EPU) index for the same objects and period time. Evidence confirms our theory. Fixed effects estimation and an instrumental variable estimation with the inverse distance weighted EPU as an instrument further corroborate with our results.
Bank Information Sharing and Liquidity Risk, with Fabio Castiglionesi (Tilburg U) and Kebin Ma (WBS) [view paper] We propose a novel rationale for the existence of bank information sharing schemes. Banks may voluntarily disclose borrowers' credit history to maintain asset market liquidity. By sharing such information, banks mitigate adverse selection when selling their loans in secondary markets. This reduces the cost of asset liquidation in case of liquidity shocks. Information sharing arises endogenously when the liquidity benefit dominates the cost of losing market power in the primary loan market competition. We show banks having incentives to truthfully disclose borrowers' credit history, even if such information is non-verifiable. We also provide a rationale for promoting public credit registries.
Contagious Bank Runs and the Net Stable Funding Ratio Requirement Conventional wisdom suggests that banks with a high net stable funding can better fend off runs. In a dynamic global-games model with asset sales, bank runs, and aggregate uncertainties, we show that a high net stable funding can also depress banks' asset prices due to asset buyers' pessimistic inferencing: given that a bank with a high net stable funding faces a run, the aggregate state must be unusually poor. Asset buyers’ low willingness to pay can, in turn, precipitate runs in all other banks in the first place. We show that an increase in the net stable funding can lead to an unambiguous increase in the risk of contagion.
Selected Work in Progress:
The Making of (Modern) Banks, with Kebin Ma (WBS) and Lucy White (BU)