Research

This paper develops a quantitative model of bank failure to study how funding maturity and debt dilution shape financial distress. Motivated by the balance-sheet dynamics preceding bank failures, the model features heterogeneous banks that choose between short- and long-term funding under limited commitment and the possibility of self-fulfilling runs. Long-term funding reduces rollover risk but also encourages higher leverage through debt dilution. These forces generate endogenous default and reproduce key pre-failure dynamics in leverage, funding composition, profitability, and loan performance. Counterfactual exercises show that debt dilution primarily affects financing decisions, whereas runs mainly increase refinancing risk. Overall, the paper highlights the importance of liability-side incentives in shaping financial distress.

This paper analyzes how heterogeneity in banks’ funding structures shapes the transmission of monetary policy. Banks finance themselves with liabilities that differ in maturity, and I document empirically that banks with longer-maturity liabilities are less responsive to monetary policy shocks. To interpret this finding, I develop a heterogeneous-bank macroeconomic model with endogenous default and funding choices. In the model, maturity choice arises from banks’ limited ability to raise new debt, due either to limited commitment or regulatory constraints. Long-term liabilities help constrained banks avoid liquidity shortfalls but entail higher funding costs. Using this framework, I quantify the aggregate implications of monetary policy and show that its effects depend critically on the distribution of banks’ funding maturities.

We investigate how exposure to the global financial cycle influences credit cycles and sovereign default risk in emerging markets. We document that emerging markets with financial sectors more reliant on foreign funding exhibit greater sensitivity to the Global Financial Cycle, proxied by the U.S. stock market volatility index (VIX). During periods of heightened global risk premium, these economies experience reduced lending and rising CDS spreads for their governments. Our model connects these phenomena, emphasizing the macro-financial linkages between global capital flows and domestic credit dynamics in emerging economies.