Working Papers

Failing Banks, with Sergio Correia and Stephan Luck
Revise and Resubmit, Quarterly Journal of Economics
Media: Macro Musings Podcast, Finance & History podcast, Marginal Revolution, American Banker, Liberty Street Economics I, II, III, PCB Central Blog
Abstract: Why do banks fail? We create a panel covering most commercial banks from 1865 through 2023 to study the history of failing banks in the United States. Failing banks are characterized by rising asset losses, deteriorating solvency, and an increasing reliance on expensive non-core funding. Commonalities across failing banks imply that failures are highly predictable using simple accounting metrics from publicly available financial statements. Predictability is high even in the absence of deposit insurance, when depositor runs were common. Bank-level fundamentals also forecast aggregate waves of bank failures during systemic banking crises. Altogether, our evidence suggests that the ultimate cause of bank failures and banking crises is almost always and everywhere a deterioration of bank fundamentals. Bank runs can be rejected as a plausible cause of failure for most failures in the history of the U.S. and are most commonly a consequence of imminent failure. Depositors tend to be slow to react to an increased risk of bank failure, even in the absence of deposit insurance. 

Credit Allocation, Collateral, and Economic Development, with Paul Dai and Karsten Müller
Abstract: This paper studies the interplay between the sectoral allocation of credit and long-run economic development. We document new Financial Kuznets Facts: as economies grow, (i) the share of manufacturing credit relative to value added falls, (ii) the share of real estate credit rises, and (iii) the reliance on and price of real estate collateral increase. A two-sector structural change model with collateral constraints explains these patterns through an economic channel (a rise in manufacturing productivity) and a financial channel (a relaxation of real estate financing constraints). We provide several pieces of reduced-form evidence that the financial channel asymmetrically increases real estate credit over development. Further, new data reveal that the liberalization of directed credit policies is associated with a reallocation of credit from manufacturing to real estate, as such policies historically prioritized manufacturing. Finally, we document that manufacturing credit predicts higher long-run growth, while real estate credit predicts lower growth, suggesting that the allocation of credit may matter for understanding long-run growth.

Household Debt Relief and the Debt Laffer Curve, with Gyozo Gyongyosi
Abstract: Debt relief programs are often implemented in debt crises to alleviate debt overhang. If debt overhang is severe, debt relief can even benefit creditors by increasing repayment rates. This paper studies the impact of a large-scale household debt relief program in Hungary that reduced outstanding debt burdens by an average of 14% for over 850,000 housing loans. We find that debt relief leads to a sustained increase in both repayment rates and borrower income. The effects are hump-shaped in initial indebtedness, with the strongest responses among borrowers in the fourth quintile of indebtedness. We construct the Debt Laffer Curve, which relates the net present value of debt to its face value, and find that it flattens and can invert for highly indebted borrowers. A model of household debt overhang and labor supply can account for these findings.

The Foreign Currency Fisher Channel: Evidence from Households, with Gyozo Gyongyosi and Judit Rariga
Media: SUERF Policy Brief
Abstract: We study how foreign currency debt exposure shapes household adjustment to a large exchange rate depreciation. Using household survey and bank customer data during Hungary’s 2008 currency crisis, we find that foreign currency borrowers cut consumption one-for-one with increased debt service, consistent with a foreign currency Fisher channel. Both the quantity and quality of expenditures decline, indicating a “flight from quality.” Debt revaluation has a limited effect on overall labor supply, but there is a substitution toward foreign income and home production. Our findings point to the relevance of open-economy models with incomplete markets, heterogeneous foreign currency exposures, and liquidity constraints.

Business as Usual: Bank Net Zero Commitments, Lending, and Engagement, with Pari Sastry and David Marques-Ibanez
Media: New York Times, CNN Business, Financial Times, The Banker, VoxEU, MIT Sloan, Ideas Made to Matter
Abstract: We use administrative credit registry data from Europe to study the impact of voluntary lender net zero commitments. We have two sets of findings. First, we find no evidence of lender divestment. Net zero banks neither reduce credit supply to the sectors they target for decarbonization nor do they increase financing for renewables projects. Second, we find no evidence of reduced financed emissions through engagement. Borrowers of net zero banks are not more likely to set decarbonization targets or reduce their verified emissions. Our estimates rule out even moderate-sized effects. These results highlight the limits of voluntary commitments for decarbonization.

Publications

The Debt-Inflation Channel of the German Hyperinflation, with Markus Brunnermeier, Sergio Correia, Stephan Luck, and Tom Zimmermann
Conditionally Accepted, American Economic Review
Replication Kit
Media: VoxEU, Liberty Street Economics, Virtual presentation (Markus’ Academy)

Credit Allocation and Macroeconomic Fluctuations, with Karsten Müller
Review of Economic Studies, November 2024
ReStud Version, Replication Kit, Website with sectoral credit database: The Global Credit Project
Media: World Bank All About Finance Blog, Marginal Revolution, Yahoo Finance, Noahpinion

Pandemics Depress the Economy, Public Health Interventions Do Not: Evidence from the 1918 Flu, with Sergio Correia and Stephan Luck
Journal of Economic History, December 2022 (Lead Article)
JEH Version, Replication Kit, Response to Lilley et al
Selected Media: Video of presentation from IMSI Conference (Session IV), The Economist, Vox, The Atlantic, NY Times, NY Times (Upshot), NY Times (John Barry)

Financial Crisis, Creditor-Debtor Conflict, and Populism, with Gyozo Gyongyosi
Journal of Finance, August 2022
JF Version
Media: The Hill, LSE, MIT News

Banking Crises Without Panics, with Matthew Baron and Wei Xiong
Quarterly Journal of Economics, February 2021
QJE Version, Replication Kit, BVX banking crisis chronology
Media: EconReporter, MIT News

Household Debt Revaluation and the Real Economy: Evidence from a Foreign Currency Debt Crisis, with Gyozo Gyongyosi
American Economic Review, September 2020 (Lead Article)
AER Version
Media: AEA Chart of the Week, Telex.hu

How Does Credit Supply Expansion Affect the Real Economy? The Productive Capacity and Household Demand Channels, with Atif Mian and Amir Sufi
Journal of Finance, April 2020
JF Version, Online Appendix, Replication Kit
Media: FT Alphaville, Equitable Growth, Barron’s, Chicago Booth Review, Woodrow Wilson School

Household Debt and Business Cycles Worldwide, with Atif Mian and Amir Sufi
Quarterly Journal of Economics, November 2017
QJE Version, Online Appendix, Replication Kit
Out-of-sample replication on the IMF's Global Debt Database, Replication kit for out-of-sample test
Media: NBER Digest, NBER Corporate Finance Program Report, Equitable Growth, The Economist, Chicago Booth Review

Book Chapters and Written Discussions

Comment on “Sustained Debt Debt Reduction: The Jamaica Exception,” by Arslanalp, Eichengreen, and Henry
Brookings Papers on Economic Activity, 2024
Replication Kit

Private Debt Booms and the Real Economy: Do the Benefits Outweigh the Costs?
in Leveraged: The New Economics of Debt and Financial Fragility, (Edited by Moritz Schularick), The University of Chicago Press, 2022
Replication Kit
Media: Video of presentation. Link to all conference presentations.