Contributions published at Banking (Steven Ongena)

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Focusing on the art market, where auction houses act as brokers between art sellers and buyers, we investigate whether more experienced brokers achieve better performance as information providers and matchmakers. We find that houses with artist‐specific experience are more likely to achieve a sale and provide more precise pre‐sale estimates. These findings suggest that experience in a specific market segment plays an important role for brokers to reduce illiquidity and opacity in markets with asymmetric information. Our analysis also shows that specific experience matters above and beyond other house‐specific factors, including reputation and market power.

Unemployment insurance (UI) policies are implemented by many countries to lower individual income risk and to automatically stabilize macroeconomic fluctuations. To the extent that these policies are successful, they should be reducing precautionary savings and hence bank deposits - households' major saving instrument. In this paper, we use this lower incentive to save and uncover a novel distortionary mechanism through which UI policies affect the economy. In particular, we show that when state UI benefits become more generous bank deposits decrease. Since deposits are the main and uniquely stable funding source for banks, the decrease in deposits squeezes bank commercial lending, which in turn reduces firm investment. These results imply that UI policies have the potential to destabilize the economy through banking sector by impairing banks' deposit funding - banks' major and stable funding source, which makes banks more exposed to negative shocks during bad times.

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Are options on exchange-traded products (ETPs) and indexes consistently priced internationally? The cross-section of international option returns exhibits a mispricing by sorting on ex-ante volatility returns. In addition, selling international ETP options and buying their corresponding index options commands a positive risk premium. Both empirical findings are economically large and pervasive internationally, whereas they are comparably small domestically. While volatility hedge funds are exposed towards domestic option products, they neglect the possibility of engaging in foreign volatility arbitrage. These findings entail that alpha seekers may expand their horizon towards international derivatives which at first glance are similar, but institutionally are not.

We document empirically that the returns from shorting out-of-the-money S&P 500 put options are concentrated in the few days preceding their expiration. Back-month options generate almost no returns, and front-month options do so only towards the end of the option cycle. The concentration of the option premium at the end of the cycle reflects changes in options’ risk characteristics. Specifically, options’ convexity risk increases sharply close to maturity, making them more sensitive to jumps in the underlying price. By contrast, volatility risk plays a smaller role close to maturity. Our results imply that speculators wishing to harvest the put option premium should short front-month options only during the last days of the cycle, while investors wishing to protect against downside risk should use back-month options to reduce hedging costs.

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We investigate the effect of bank monitoring on loan repayment. Using granular loan-level information from the Italian Credit Register, we build a novel measure of bank monitoring, which is based on bank requests for information on their existing borrowers. We perform a causal analysis, exploiting the Italy Regional Production Tax, IRAP, as a source of exogenus variation in bank monitoring. Our approach is supported by a theoretical model predicting that a decrease in the tax rate improves bank incentives to monitor borrowers. We find that an increase in the number of requests for information, as driven by a 1 percentage point decrease in the IRAP tax rate, reduces the probability of loan distress by 4 percentage points two quarters ahead.

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Starting in the 1970s, various countries deregulated their banking systems and abandoned the strict rules that governed financial institutions since the Great Depression. Deregulation was intended to increase competition in the credit market, improve consumers’ welfare but it has been indicated by many observers to be at the roots of the 2008 financial crisis. Despite the large interest in this issue, we have limited knowledge of the effects of deregulation and increased bank competition on the real economy. Does banking deregulation have a positive effect on firms’ access to credit and investment? Or does it only increase the fragility of the financial system?

Why do some residential mortgages carry a fixed interest rate and others an adjustable rate? To answer this question we studied unique data from 103 banks belonging to 73 different banking groups across twelve countries in the euro area. To explain the large cross-country and time variations observed, we distinguished between the conditions that determine the local demand for credit and the characteristics of banks that supply credit. As bank funding mostly occurs at the group level, we disentangled these two sets of factors by comparing the outcomes observed for the same banking group across the different countries. Local demand conditions dominate. In particular we find that the share of new loans with a fixed rate is larger when: (1) the historical volatility of inflation is lower, (2) the correlation between unemployment and the short-term interest rate is higher, (3) households' financial literacy is lower, and (4) the use of local mortgages to back covered bonds and of mortgage-backed securities is more widespread.