Abstract: This paper evaluates the role of investor risk sentiments in the commercial bank lending market and their effect on macroeconomic outcomes. I create a new empirical measure of bank risk sentiment (BRS) using regulatory data covering the universe of US commercial banks and an identification scheme motivated by a novel, analytical, heterogeneous bank model. BRS is countercyclical with spikes during financial crises, but is heterogeneous at the bank level. Loan-level analysis then shows that an increase in bank-level risk sentiment is associated with a decrease in credit supply and tightening loan covenants. While at the macro-level, an increase in aggregate BRS leads to a broad-based deterioration in macroeconomic and financial outcomes. Lastly, I present evidence that BRS is distinct from corporate bond market investors’ risk sentiment, and is more important in explaining economic fluctuations. I conclude that BRS plays a significant role in determining the price and quantity of bank loans and macroeconomic outcomes.
Coauthored with Andrea Ajello
Abstract: We estimate the effect of monetary policy on financial vulnerabilities and the implications for macroeconomic tail risk. We first extract a small set of common factors from a large dataset of financial vulnerability indicators, estimating a factor-augmented proxy SVAR to study the response of aggregate economic activity, inflation, and financial vulnerabilities to monetary policy shocks. We then estimate the effect of changes in the financial vulnerability factors on macroeconomic tail risk via quantile regressions. We find that an unexpected monetary policy tightening can lower asset valuation vulnerabilities in the short term and slow down credit growth in the medium term. As tighter monetary policy reduces asset valuation pressures, it does so at a cost of a sizable increase in macro tail risk in the short term that is only partially offset by a modest reduction in tail risk in the medium term, induced by a slowdown in credit growth.
Coauthored with Huberto Ennis, Elijah Broadbent, and Horacio Sapriza
Abstract: We construct bank credit supply indicators for the four major loan categories in the United States using changes in lending standards from bank-level responses to the Federal Reserve’s Senior Loan Officer Opinion Survey on Bank Lending Practices, adjusted for macroeconomic and bank-specific factors that affect loan demand. We evaluate the ability of these indicators to predict economic activity and estimate the effect of unit shocks to these indicators on economic activity and monetary policy rates. First, we find that credit supply indicators for business loans generally provide more out-of-sample predictive information for economic activity than the indicators for household loans. Second, we find that negative shocks to the credit supply indicators decrease economic activity and monetary policy rates, particularly when applied to the commercial and industrial lending category. Third, we find that the magnitude of these effects strongly depends on the stance of monetary policy and broad financial conditions, whereas a negative shock leads to monetary policy easing and declines in economic activity when either financing conditions or the monetary policy stance are tight, but has little impact otherwise.