Date of Award


Degree Type


Degree Name

Doctor of Philosophy (PhD)

Graduate Group


First Advisor

Itamar Drechsler


In the first chapter, I show that the long-term decrease in the nominal short rate since the 1980s contributed to a decline in banks' supply of business loans, firm investment and new firm creation, and an increase in banks' real estate lending. The driving force behind these relationships was the shift in banks’ funding mix from time deposits (CDs) to savings deposits, which was caused by the decrease in the nominal rate. I show that banks finance business lending with time deposits because of their matching interest-rate sensitivity and liquidity. A lower nominal rate reduces the spread on liquid deposits (e.g., savings deposits), leading households to substitute towards them and away from illiquid time deposits. In response to an outflow of time deposits, banks cut the supply of business loans and increase their price. The decrease in business lending leads to reduced investment at bank-dependent firms and a lower entry rate of firms in industries that are highly reliant on external funding. I document these relationships both in the aggregate, and in the cross-section of banks, firms and geographic areas. For identification, I exploit cross-sectional variation in banks' market power and business credit data. I develop a general equilibrium model which captures these relationships and shows that the transmission mechanism I document is quantitatively important.

In the second chapter, joint with Caterina Mendicino, Kalin Nikolov, Juan Rubio-Ramirez and Javier Suarez, we examine optimal capital requirements in a quantitative general equilibrium model with banks exposed to non-diversifiable borrower default risk. Contrary to standard models of bank default risk, our framework captures the limited upside but significant downside risk of loan portfolio returns. This helps to reproduce the frequency and severity of twin defaults: simultaneously high firm and bank failures. Hence, the optimal bank capital requirement, which trades off a lower frequency of twin defaults against restricting credit provision, is 5pp higher than under the standard default risk models which underestimate the impact of borrower default on bank solvency.

In the third chapter, joint with Martina Jasova and Caterina Mendicino, we show that a reduction in lender of last resort (LOLR) policy uncertainty positively affects bank lending and propagates to investment and employment. We exploit a unique policy that reduced uncertainty regarding the availability of future LOLR funding for banks as a quasi-natural experiment. Using micro-level data on banks, firms and loans in Portugal, we generate cross-sectional variation in banks' exposure to uncertainty and find that the size of the haircut subsidy - the gap between private market and central bank security valuations - plays a key role in the propagation of the shock to lending and the real economy.

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