Working papers:

The Ring-Fencing Bonus Bank of England Staff WP Oct 2022 (joint with Irem Erten, Warwick Business School and John Thanassoulis, Warwick Business School and CEPR)

Media coverage: , Financial Times: Martin Wolf and Helen Thomas

We study the impact of ring-fencing on bank risk using short-term repo rates. Exploiting confidential data on the near-universe of sterling-denominated repo transactions, we find compelling evidence that banking groups subject to ring-fencing are perceived to be safer; repo investors lend to ring-fenced groups at lower rates, controlling for bank characteristics and collateral risk. Ring-fenced groups charge more to supply liquidity. We show that these effects are driven by the ring-fenced subsidiary; the other subsidiaries are not adversely impacted by ring-fencing to any meaningful extent. We further document that the banking groups reduce their risk-taking after the imposition of the fence. Our paper suggests that structural reforms can have a significant beneficial impact on risk in the banking system.

Capital Allocation, Leverage Ratio Requirement and Banks’ Risk-Taking –BoE SWP May 2022  (joint with Quynh-Anh Vo, Bank of England)

This paper examines how banks’ asset risk is affected by the level (ie group or business unit) at which regulatory requirements are applied. We develop a theoretical model and calibrate it to UK banks. Our main finding is that the impact differs depending on which regulatory constraint is binding at the group level. If that is the leverage ratio requirement, then the allocation of regulatory constraints to business units either maintains or decreases the riskiness of banks’ investment portfolios. However, if the risk-weighted requirement is the binding constraint at the group level, applying regulatory requirements at the business unit level can lead to banks selecting riskier asset portfolios as optimal. We also find that the impact on banks’ asset risk differs across bank business models.

Presented at: EFMA 2021, IFABS 2021, 37th Symposium on Money Banking and Finance BdF 2021, WinE EEA 2021, 20th Annual FDCI/JFSR Bank Research Conference 2021, ASSA 2022, ERMAS Romania 2022

Risk-Taking, Competition and Uncertainty. Do CoCo Bonds Increase the Risk Appetite of Banks?  [under major revision]- BoE /CEPR WP Aug 2021 (joint with Mahmoud Fatouh, Bank of England, and Sweder van Wijnbergen, UvA)

We assess the impact of contingent convertible (CoCo) bonds and the wealth transfers they imply conditional on conversion on the risk-taking behaviour of the issuing bank. We also test for regulatory arbitrage: do banks try to maintain risk-taking incentives by issuing CoCo bonds, when regulators reduce them through higher capitalisation ratios? While we test for, and reject sample selection bias, we show that CoCo bonds issuance has a strong positive effect on risk-taking behaviour, and so do conversion parameters that reduce dilution of existing shareholders upon conversion. Higher economic volatility amplifies the impact of CoCo bonds on risk-taking.

Presented at: Royal Economic Society Symposium 2021, IFABS 2021, Money Macro and Finance Society Annual Conference 2021, 19th Winter School of Mathematical Finance 2022

Multiple buffer CoCos and their impact on financial stability Tinbergen Institute WP Jan 2020 

In this paper we develop a theoretical model to investigate the effect on a bank’s financial stability of having multiple contingent convertible bonds buffers (CoCos) on the same bank balance sheet, using cash-in-the-market pricing and global games methodologies. Contingent convertible bonds are meant to act as a bail-in mechanism for banks, where CoCo debt converts into equity when a bank needs it the most. We find that having CoCo buffers which trigger at different capitalisation levels can be detrimental to the CoCo bail-in capacity. Market-based triggers lead to premature conversion and fire-sales of equity. In contrast with existing literature, we show that book-based trigger CoCos yield an optimal outcome, as long as they incorporate expected credit losses.

Presented at: GSE Barcelona 2018, IFABS 2018, FMA European Conference 2018, INFER 2019, Queen Mary Economics and Finance PhD workshop 2019, ERMAS Romania 2019

Work in progress:

Clearing incentives – The role of cash constraints in interest rate swap clearing (2022) (joint with Umang Khetan, Tippie College of Business, University of Iowa)

(Updated: 4 Dec 2022)

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