Research

Publications

Banking regulation and collateral screening in a model of information asymmetry
Journal of Financial Services Research 61, 367-405 (2022)
Also available as Bank of Lithuania Working Paper No 73.
This paper explores the impact of banking regulation on a competitive credit market with ex-ante asymmetric information and aggregate uncertainty. I construct a model where the government imposes a regulatory constraint that limits the losses banks make in the event of their default. I show that the addition of banking regulation results in three deviations from the standard theory. First, collateral is demanded of both high and low risk firms, even in the absence of asymmetric information. Second, if banking regulation is sufficiently strict, there may not exist an adverse selection problem. Third, a pooling Nash equilibrium can exist.

Working Papers

The role of central bank digital currency in an increasingly digital economy
Available as Bank of England Staff Working Paper No. 1,101.
The introduction of an unremunerated retail central bank digital currency (CBDC) is currently under consideration by several central banks. Motivated by the decline in transactional cash usage and the increase in online sales in the UK, this paper provides a theoretical framework to study the underlying drivers of these trends and the welfare implications of introducing an unremunerated retail CBDC. A cash credit model with physical and digital retail sectors is developed, with endogenous entry of firms and directed consumer search. Calibrating to UK data between 2010 and 2022 the model suggests that there are positive welfare gains from introducing an unremunerated retail CBDC, but these have likely declined over time.

The impact of central bank digital currency on bank deposits and the interbank market
Previous working paper version Bank of Lithuania Working Paper No 110.
This paper proposes a theoretical model in which a central bank digital currency (CBDC) and bank deposits are imperfect substitutes. Deposits are subject to liquidity shocks. In the absence of a CBDC, the interbank market can redistribute liquidity between banks. The introduction of CBDC leads to a greater reliance of the banking sector on central bank standing facilities. Calibrating the model to the euro area, the model shows that adjusting the remuneration rate of CBDC has little pass-through to the deposit rate set by banks and also has implications for the transmission of monetary policy especially if the CBDC is unremunerated.

Macroeconomic implications of insolvency regimes
Available as Bank of Lithuania Working Paper No 77.
The impacts of creditor and debtor rights following firm insolvency are studied in a firm dynamics model where defaulting firms choose between restructuring or exit. The model accounts for differing effects of productivity shocks across economies that differ in the credit/debtor rights. Following a negative shock labour productivity falls sharply in a creditor-friendly regime such as the UK while in a debtor-friendly regime such as the US, there is a larger employment response. This paper suggests a possible explanation for the different employment and labour productivity response in the UK and US since the financial crisis.

The Impact of Bank Competition on Loan Applications
How does competition in the loan market affect firm loan applications? I model competition in a loan market where firms choose between applying to a bank, an uninformed lender or neither. Banks have an informational advantage over lenders in the form of a costly creditworthiness test. The choice of lender depends on the ex ante riskiness of the borrower. Low risk borrowers apply to the uninformed lender, high risk firms do not apply for loans while intermediate risk borrowers apply for banks. The model predicts that increased bank concentration benefits higher risk borrowers at the cost of lower risk borrowers.

Work in Progress

The effect of the financial crisis on bank lending to SMEs joint with Alan Crawford
In this paper we develop a model of bank lending to small-to-medium enterprises (SMEs). Combining a bi-annual survey of European SME financing decisions with a contemporaneous EU-wide banking conditions survey, we empirically evaluate the determinants of successful loan applications during the financial crisis.