Published Papers

Portfolio Diversification and Systemic Risk in Interbank Networks 

Journal of Economic Dynamics and Control, 82, 96-124, 2017

Joint with Stefano Battiston (University of Zurich) and Paolo Tasca (University College  London)


This paper contributes to a growing literature on the ambiguous effects of risk diversification. In our model, banks hold claims on each other’s liabilities that are marked-to-market on the individual financial leverage of the obligor. The probability of systemic default is determined using a passage-problem approach in a network context and banks are able to internalize the network externalities of contagion through their holdings. We study the optimal diversification strategy of banks in the face of opposite and persistent economic trends that are ex-ante unknown. We find that the optimal level of risk diversification may be interior or extremal depending on banks’ exposure to external assets and that individual incentives may favor a banking system that is over-diversified with respect to the social optimum.

Working Papers

Global Banks’ Dollar Funding: A Source of Financial Vulnerability

Joint with Adolfo Barajas (IMF); Claudio Raddatz (IMF); Dulani Seneviratne (IMF) ; Peichu Xie (IMF) ; Yizhi Xu (IMF)

Leading up to the global financial crisis, US dollar activity by global banks headquartered outside the United States played a crucial role in transmitting shocks originating in funding markets. Although post-crisis regulation has improved banking systems’ resilience, US dollar funding remains a global vulnerability, as evidenced by strains that reemerged in March 2020 in the midst of the COVID-19 crisis. We show that shocks to US dollar funding costs lead to financial stress in the home economies of these global non-US banks, and to spillovers to borrowers, especially emerging economies. US dollar funding vulnerability amplifies these negative effects, while some policy-related factors act as mitigators, such as swap line arrangements between central banks and international reserve holdings. Thus, these vulnerabilities should be monitored and, to the extent possible, controlled


Predicting Downside Risks to House Prices and Macro-Financial Stability

Joint with Mitsuru Katagiri (BoJ), Sohaib Shahid (IMF), and Nico Valckx (IMF)

This paper predicts downside risks to future real house price growth (house-prices-at-risk) in 32 advanced and emerging market economies. Through a macro-model and predictive quantile regressions, we show that current house price overvaluations, excessive credit growth, and tighter financial conditions jointly forecast higher house-prices-at-risk up to three years ahead. House-prices-at-risk (HaR) can in turn predict future growth at risk and financial crises. We also investigate and propose policy solutions for preventing the identified risks. We find that overall, a tightening of macroprudential policy is the most effective at curbing downside risks to house prices, whereas a loosening of conventional monetary policy reduces short term downside risks only in advanced economies.

A Model of Network Formation for the Overnight Interbank Market

Joint with Mikhail Anufriev (University of Technology Syndey), Valentyn Panchenko (University of New South Wales) and Paolo Pin (Bocconi University)


We introduce an endogenous network formation model of the interbank overnight lending market. Banks are motivated to meet the minimum reserve requirements set by the Central Bank but their reserves are subject to random shocks. To adjust their expected end-of-the-day reserves, banks enter the interbank  market, where borrowers decrease their expected cost of borrowing with the Central Bank, and lenders decrease their deposits with the Central Bank in an attempt to obtain a higher interest rate from the interbank market while facing counter-party default risk. In this setting, we show that a financial network arises endogenously, exhibiting a unique giant component which is connected but bipartite in lenders and borrowers. The model reproduces features of trading decisions observed empirically in the Italian e-MID market for overnight interbank deposits.

Liquidity in Times of Distress: The Effect of Interbank Network Structure


This paper identifies the importance of market power in the interbank market during times of distress. We show that in the aftermath of the 2008 financial crisis, lending and borrowing in the Italian overnight unsecured interbank market became more sensitive to banks’ network position. We fit the observed network to a core-periphery structure and find that highly connected core banks were able to selectively charge higher interest rates on loans to and pay lower interest rates on loans from sparsely connected periphery banks over the course of the crisis. We use link level variation to verify that the differences stem from banks’ network contingent market power. This demonstrates banking sector interconnectedness as a source of market illiquidity and sheds light on the effective design of central bank liquidity policy.

Policy Work

A new financial stability risk index to predict the near-term risk of recession (FSR, 2018)

Joint with Peter Welz (ECB), Dawid Zochowsky (ECB). Published as part of the Financial Stability Review May 2018.

This paper estimates the predictive power of systemic risk buildup on the probability of future macroeconomic downturns. We first put forward a broad range of individual indicators to capture fluctuations in non-financial imbalances, financial vulnerability, risk appetite and systemic risk. To efficiently aggregate information across indicators, we then construct a composite index of systemic risk through semiparametric dimension reduction. Increases in the composite index robustly forecast future drops in the distribution of economic activity. A one standard deviation increase in the index predicts that the 20th percentile of the GDP growth shock distribution shifts downwards by 71% in the following quarter.

The Effects of Negative Interest Rates on Interbank Markets

Joint with Yiming Ma (Stanford GSB), Livia Polo Friz (ECB) and Christoffer Kok (ECB)

We show that the effects of negative interest rates are amplified through the unsecured interbank market. As retail deposit rates are floored at zero while asset returns track policy rates, reliance on retail deposits shrinks net returns, lowers bank capital and raises the cost of external financing. Banks relying more heavily on retail deposits face stronger downward pressure on net interest margins and reduce lending to other banks in the unsecured money market by more. However, deposit reliant banks also tend to be more profitable and better capitalised to begin with, alleviating the net adverse impact of negative rates.