Filip MROWIEC will defend his thesis on Tuesday 28 June at 04:00 PM (MH 202, Manufacture des tabacs, 21 Allée de Brienne 31000 Toulouse)
« Barriers to liquidity in market-based intermediation »
Supervisor: Professor Alexander GUEMBEL
To attend the conference, please contact the secretariat Elvire Jalran
- M. Alexander GUEMBEL, Universiy of Toulouse 1 Capitole, TSE, Supervisor
- M. Fabio CASTIGLIONESI, Tilburg University, Rapporteur
- Mme Lucy WHITE, Boston University, Rapporteure
- M. Andrea ATTAR, Toulouse School of Economics, Examinateur
The overarching goal of my thesis is to understand barriers to liqudity in market-based finance. Understanding this new financial system paradigm is important because it performs an increasing share of the maturity transformation. While regulators of traditional banks can rely on an extensive body of scientific studies, our understanding of shadow banks and other financial institutions lacks such a complete academic underpinning. My thesis collects insights on collateralized lending, repo markets and liqudity in corporate bond markets.
In the first chapter, I study how and when transparency can be disadvantageous given multiple (symmetric) counterparties. Many secured lending markets are opaque, allowing borrowers potentially to conceal multiple borrowing relationships. The policy debate has proposed transparency to curtail hidden risk. In this paper, I show that transparency may backfire due to increased credit rationing under multiple borrowing. In a transparent market, an opportunistic lender can easily coordinate with the borrower at the expense of a pre-existing lender. This becomes more difficult in an opaque market, as an opportunistic lender may more easily find himself at the receiving end of a different opportunistic move by the borrower. Lenders are therefore more cautious in an opaque market. This can restore the second-best allocation. I show that over-collateralization plays a key role in this mechanism as it constrains the borrower's ability to increase leverage opportunistically. Finally, I provide a clear characterization of when opacity achieves allocations that dominate those that can be achieved under market transparency in terms of welfare.
In my second chapter, I study how some lenders protect against a winner's curse in the repo market. Market-makers finance their inventories through repurchase agreements, using inventory securities as collateral. They face a variety of counterparties of varying degrees of sophistication regarding their ability to value the securities. Theoretically, less sophisticated counterparties should fear the winner's curse of receiving worse collateral. In my model, a market-maker seeks a more sophisticated lender to finance better collateral at lower rates. The less sophisticated lender cannot observe the market-maker's behaviour and charges higher interest rates to compensate. I test my model prediction and find support for a compensation that is higher for market-makers with a higher number of sophisticated lender contacts. The increase in uncertainty during the Covid-19 pandemic serves as an exogenous variation in the informational advantage of more sophisticated lenders.
My work suggests that opacity exacerbates fragility for well-connected borrowers, as less sophisticated lenders charge higher rates to compensate for the possibility of hidden cherry-picking.
In my third chapter, titled "Dynamic Liquidity Provision for Corporate Bonds under Capital Constraints", I study how capital constraints can delay bilateral trades. After the financial crisis, many corporate bond practitioners lamented the poor state of market liquidity for large corporate bond trades, while academic research painted an inconclusive picture of liquidity conditions. Motivated by this tension, I find theoretically that scarce capital and restrictions to only bargain on spot trades can delay trades. The spot trade restriction implies a market incompleteness under which agents must trade bundles of claims. Under scarcity, the buyer frets over capital wasted on claims without gains from trade. Waiting can unbundle claims. Therefore, I argue that scarce capital after the financial crisis can explain smaller trades and trade delays. The deterioration in the time dimension of liquidity explains the practitioners' claims of deteriorated liquidity conditions. My model relates trade timing to the scarcity of capital, bargaining power distribution and dynamics of gains from trade.