We study real estate lending responses to tighter macroprudential policy (MPP) in the form of lower required loan-to-value (LTV) ratios. Contract details of 2.4 million mortgage loans originated between 2008 and 2020 reveal significantly fewer new loan issuances in response to contractionary MPP, commensurate with an average reduction in aggregate lending of 21 percent. Loan-level analyses reveal, however, that banks comply with lower LTVs by systematically more benevolent valuations of residential real estate pledged as collateral instead of reducing loan size. Exploiting earthquakes as plausible exogenous shocks to property values corroborates these risk-shifting patterns by banks in the form of inflated property valuations after LTV shocks.

This paper examines how firms’ exposure to supply chain disruptions (SCD) affects firm outcomes in the European Union (EU). Exploiting heterogeneous responses to workplace closures imposed by sourcing countries during the pandemic as a shock to SCD, we provide empirical evidence that firms in industries relying more heavily on foreign inputs experience a significant decline in sales compared to other firms. We document that external finance, particularly bank financing, plays a critical role in mitigating the effects of SCD. Furthermore, we highlight the unique importance of bank loans for small and solvent firms. Our findings also indicate that highly diversified firms and those sourcing inputs from less distant partners are less vulnerable to SCD.

Banks have been operating in a low interest rate environment paired with booming housing markets. For the largest banks in the euro area and the period 2015-2022, we assess whether banks reallocate their foreign loan portfolio backed by real estate as a response to differences in local lending spreads across the home and destination country and conditional on reduced information frictions due to borrowing-country exposures. The main result is that the relative share of foreign real estate backed lending increases in case of return opportunities, and this sensitivity depends on local exposures towards the borrowing country. The result is driven by subsamples for which neither the home nor the borrowing country have implemented macroprudential regulation targeting real estate lending, or for which there is a misalignment in macroprudential policies. Nevertheless, we find limited evidence that the riskiness of real estate backed loans goes up during our sample period, and we discuss potential reasons for this result including the possibility of hidden losses.

We show that the response of banks’ net interest margin (NIM) to monetary policy shocks is state dependent. Following a period of low (high) Federal Funds rates, a contractionary monetary policy shock leads to an increase (decrease) in NIM. Aggregate economic activity exhibits a similar state-dependent pattern. To explain these dynamics, we develop a banking model in which social interactions influence households’ attentiveness to deposit interest rates. We embed that framework within a nonlinear heterogeneous-agent NK model. The estimated model accounts well quantitatively for our key empirical findings.

This paper analyzes the impact of reduced tax incentives for equity financing on banks' regulatory capital ratios under the Basel III regime. We are particularly interested in a recent interest rate cut in the Italian corporate equity allowance, which reduces the relative tax advantage of equity financing. The results show that banks respond to this increased tax disparity by significantly reducing their regulatory capital while at the same time reducing their risk-taking. The decline in capital is more pronounced for small banks and outweighs the initial capital gains from the introduction of this tax instrument. Our results challenge the use of equity allowances, in that financial stability gains persist only as long as costly tax subsidies remain intact and diminish as the size of the subsidy is reduced.

We analyze how creditor rights affect the nonsynchronicity of global corporate credit default swap spreads (CDS-NS). CDS-NS is negatively related to the country-level creditor-control rights, especially to the “restrictions on reorganization” component, where creditor-shareholder conflicts are high. The effect is concentrated in firms with high investment intensity, asset growth, information opacity, and risk. Pro-creditor bankruptcy reforms led to a decline in CDS-NS, indicating lower firm-specific idiosyncratic information being priced in credit markets. A strategic-disclosure incentive among debtors avoiding creditor intervention seems more dominant than the disciplining effect, suggesting how strengthening creditor rights affects power rebalancing between creditors and shareholders.