Research
with Ndackyssa Oyima-Antseleve
Abstract: In this paper, we trace how crypto risk transmits to systemic risk within the financial system. First, we measure crypto risk and crypto-driven systemic risk at the financial firm level. Using these metrics, we show that firm-level crypto risk has been rising significantly in recent years and leads to greater systemic risk exposure and transmission, through different channels. Specifically, crypto risk affects systemic risk exposure through both blockchain technology and asset-class channels but elevates systemic risk transmission mainly via the blockchain technology channel. Notably, financial firms’ management tends to overlook the transmission of risk through the blockchain technology channel. Our findings highlight the multifaceted nature of crypto risk and underscore the importance of a global regulatory framework.
Abstract: In this paper, we trace a fully-specified bank lending channel by using a trade shock, the law of the US granting China Permanent Normal Trade Relation Status (PNTR shock) in 2001. Specifically, PNTR shock causes banks to terminate their lending relationships and tighten loan contracts with firms in the trade sector. Next, PNTR shock negatively impacts the bank’s performance via lending relationships. Finally, Banks pass this shock to non-trade sector firms in their loan portfolio. Therefore, our empirical results highlight a bank’s special role as an inter-industry shock transmitter and have important policy implications.
AFA Annual Meeting 2024
with Christopher James and Darius Palia
Abstract: In this paper we examine changes in the relationship between bank risk and the structure of bank CEO compensation following the enactment of the Dodd-Frank Act of 2010. Using a diff-in-diff methodology, we find significant differences between high and low pay-risk sensitivity banks. Specifically, we find differences in performance-vesting restricted stock awards, LTIPs, anti-hedging provisions and emphasis on non-financial measures of performance to increase after Dodd-Frank. Additionally, differences in time-vesting options grants and annual bonuses decreased. Instrumenting for these differences in compensation structure, we find that bank risk went down in the post-Dodd-Frank period. The risk reduction is driven by high pay-risk banks. No significant effect is found for differences in bank performance. The above results suggest that Dodd-Frank achieved its intended legislative intent of reducing excessive pay-risk without adversely impacting bank performance.
FMA 2021; Empirical Legal Studies 2023
with Kose John and Darius Palia
Abstract: We analyze the impact of the bank CEO’s pay-risk sensitivity (‘vega’) on four loan contract terms, loan spreads, existence of collateral, and the number and strictness of covenants. Using abank-level fixed effects model to control for time-invariant bank characteristics, we find that increases in vega are correlated with lower loan spreads, lower probability of the loan being secured, and a lower number and strictness of covenants. This suggests that CEOs reduce the riskiness of their loan portfolios when their pay has a higher sensitivity to bank risk. We also find that bank stock return volatility is strongly positively correlated with the risk of the loan contract terms, which suggests that the stock market understands the riskiness of the bank loan portfolio. Finally, we find that longer borrower-bank relationships help borrowers get loans that are riskier in the presence of risk averse bank CEOs, and a larger distance between bank and borrower reduces the market power of the bank.
with Gang Bai
Abstract: In this paper, we leverage the bank governance reform in China as a laboratory to explore the impact of the banking governance system on lending activities. Specifically, a well-functioning governance system does not improve the bank’s selection abilities due to the regulation constraints. However, a good governance system enhances the bank’s monitoring abilities. Finally, a well-governance bank needs more independent directors on the board, lower shareholdings of the top 1 shareholder, the government as the top 1 shareholder, and fewer risk management committee meetings. Therefore, this paper sheds light on banking governance and has important policy implications for bank sectors in the transition economy.
FMCG 2023