VUILLEMEY Guillaume

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The three chapters of this thesis focus on the impact of financial constraints in different contexts. For example, the first chapter analyzes the impact of new regulatory constraints on the interest rate derivatives portfolio of US commercial banks. In particular, we study the effect of the central clearing requirement for interest rate derivatives, which can represent a significant cost for end users. Our results show that a significant number of banks rebalanced their derivatives portfolios after the implementation of the reform, precisely in order to limit the use of central clearing. This type of behavior indicates that the new regulatory landscape does not create a systematic financial incentive to use central clearing for all end users subject to the reform. The second chapter studies the impact of inadequate bank credit conditions on intangible investment by European firms. For this analysis, we use new survey data providing information on firms' investment in several distinct categories of intangible assets. In addition, the survey measures firms' satisfaction with four dimensions of the loan contract, allowing us to cover a broad spectrum of possible financial constraints. Our results show that satisfaction with the loan amount is the main determinant of the likelihood to invest in intangible assets. Dissatisfaction with the interest rate, maturity and/or collateral requirements, on the other hand, negatively affects firms' ability to invest in multiple intangible assets simultaneously, preventing firms from benefiting from the complementarity of these assets. The last chapter studies from a theoretical perspective the impact of collateral constraints on the stability of financial asset prices in a market where investors have different levels of ambiguity aversion. Collateral constraints and ambiguity aversion are two market characteristics that were particularly analyzed during the 2007-2009 financial crisis given their possible roles in amplifying the initial shock. An important aspect of our model is that the growth expectations of ambiguity averse agents are endogenous and, therefore, can be impacted by regulatory constraints on collateral put in place by policy makers. The simulations show that active constraints can reduce price volatility in this context, suggesting a possible stabilizing role for tighter regulatory constraints when a portion of investors are ambiguity-averse.

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I study a contracting innovation that suddenly insulated traders of hedging contracts against counterparty risk: central clearing counterparties (CCPs) for derivatives. The first CCP was created in Le Havre (France) in 1882, in the coffee futures market. Using triple difference-in-differences estimation, I show that central clearing changed the geography of trade flows Europe-wide, to the benefit of Le Havre. Inspecting the mechanism using trader-level data, I find that the CCP solved both a "missing market" problem and adverse selection issues. Central clearing also facilitated entry of new traders in the market. The successful contracting innovation quickly spread to other exchanges.

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Bubbles are recurrent events, which contribute to both macroeconomic and employment volatility. We introduce stochastic bubbles in the standard search-and matching model of the labor market. The economy alternates between latent and bubbly states, each being associated with a distinct solution for the market value of firms (respectively, stable or explosive). Bubbles in firm value induce distortions in hiring decisions and wages, which we explicitly characterize. Faced with bubbles, the social planner optimally deviates from the standard Hosios efficiency condition. The optimal share of workers in total surplus must be above the elasticity of hiring rates, by a small but increasing amount as the bubble expands. Finally, our specification for bubbles significantly improves the quantitative ability of the model to match U.S. data, along both real and financial dimensions.

We empirically explore the fragility of wholesale funding of banks, using transaction level data on short-term, unsecured certificates of deposits in the European market. We do not observe any market-wide freeze during the 2008-2014 period. Yet, many banks suddenly experience funding dry-ups. Dry-ups predict, but do not cause, future deterioration of bank performance. Furthermore, in periods of market stress, banks with high future performance tend to increase reliance on wholesale funding. Thus, we fail to find evidence consistent with classical adverse selection models of funding market freezes. Our evidence is in line with theories highlighting heterogeneity between informed and uninformed lenders.

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How can monetary stability be guaranteed? Friedrich A. Hayek proposes a radically new answer to this question. According to him, state control of monetary issuance leads to recurrent economic crises. In 1976, Hayek defended, on the contrary, the issue of competing private currencies in parallel with national currencies. Private banks would then issue separate currencies and would be encouraged to stabilize their value, allowing for inflation over the long term that would be much lower than what we have been experiencing for several decades. The book was written shortly after the United States broke the link between the dollar and gold in 1971, giving way to the contemporary monetary system based solely on inconvertible paper currencies. For Hayek, monetary reform is urgent, because what is at stake is not a purely technical matter, but "the future of civilization": money creation by central banks undermines the proper functioning of the market and feeds the growth of the state. The future of the free society is therefore linked to the future of the monetary system.

We present a stress test model for the CDS market, with a focus on the interplay between banks' bond and CDS holdings. The model enables us to analyse credit risk transfer mechanisms, features of market and liquidity risk, and features contagious propagation of counterparty failures. As an illustration, we calibrate the model using sovereign bond and CDS holdings data for 65 major European banks. The model simulation shows that, in case of a sovereign credit event, banks' losses due to direct and correlated bond exposures are significantly larger than losses due to CDS exposures. The main risk for CDS sellers is found to be sudden increases in collateral requirements on multiple correlated CDS exposures. Close-out netting considerably reduces the extent to which contagion may occur.

This article, using Austrian Business Cycle Theory, shows how entrepreneurs and business managers are vulnerable to central bank monetary policies targeting interest rates. These policies distort market signals used as inputs in widely used capital budgeting metrics. Their reliance on nominal cash flows--together with their dependence on market-based discount rates, themselves directly or indirectly influenced by central bank policy--induces entrepreneurs to misestimate the real future profitability and feasibility of investment projects. Based on distorted market signals, entrepreneurs and business managers ignite an unsustainable economic boom. The divergence between ex ante and ex post profitable investment projects is widened because of business miscalculation leading to a cluster of errors that eventually results in the bursting of an economic boom. Therefore, although the exogenous distortion of market signals is a necessary condition of a business cycle, its ignition is purely endogenous.

This paper studies the scope for cross-border contagion in the European banking sector using true bilateral exposure data. Using a model of sequential solvency and liquidity cascades in networks, we analyze geographical patterns of loss propagation from 2008 to 2012. We study the distribution of contagion outcomes after a common shock and an exogenous bank default over simulated networks of actual long- and short-term claims.

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In its first part, this thesis studies the optimal use of derivatives by financial intermediaries in their risk management, with specific attention to the interest rate derivatives market. By modeling the optimal capital structure of a bank, the first chapter shows how the optimal use of derivatives affects some decisions often studied in corporate finance: credit supply, maturity transformation, dividend policy or default probabilities. The second part of the thesis studies the derivatives market as a system in its own right. The second chapter uses a new and unique database of bilateral exposures on CDS contracts to provide a detailed description of the structure of the exposure network. The third chapter focuses on the regulation of derivatives markets. It studies the central clearing of standardized derivatives, and the demand for collateral induced by this reform on a global scale, under a variety of assumptions about market microstructure.

This paper proposes a network formation model of an OTC derivatives market where both prices and quantities are bilaterally negociated. The key feature of the framework is to endogenize the network of exposures, the gross and net notional amounts traded and the collateral delivered through initial and variation margins, as a function of idiosyncratic counterparty risk and regulatory collateral and clearing requirements. Using the framework, we investigate numerically the size of the derivatives network, the aggregate collateral demand and the pricing of the contracts under the following schemes: (i) various levels of collateralization for uncleared transactions, (ii) rehypothecation of received collateral and (iii) clearing through a central clearing party (CCP). Overall results suggest that dynamic effects due to the endogeneity of the derivative network to the collateralization and clearing requirements have sizeable consequences on both contract volumes and prices. Intermediary trading and market liquidity are reduced by higher collateralization requirements and enhanced by rehypothecation, while the potential for contagion is reduced. Not accounting for dynamic effects in current market conditions may lead to over-estimate collateral demand induced by mandatory central clearing by up to 22%.

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This paper analyses the network structure of the credit default swap (CDS) market and its determinants, using a unique dataset of bilateral notional exposures on 642 financial and sovereign reference entities. We find that the CDS network is centred around 14 major dealers, exhibits a “small world” structure and a scale-free degree distribution. A large share of investors are net CDS buyers, implying that total credit risk exposure is fairly concentrated. Consistent with the theoretical literature on the use of CDS, the debt volume outstanding and its structure (maturity and collateralization), the CDS spread volatility and market beta, as well as the type (sovereign/financial) of the underlying bond are statistically significantly related—with expected signs—to structural characteristics of the CDS market.

This article presents the epistemological and conceptual foundations on which current attempts to model crises and assess financial risks are based. It draws a distinction between two research programs, in Lakatos' sense: on the one hand, crises understood as structural events within a cycle. on the other hand, crises seen as statistical tail events. The methodological, theoretical and practical consequences of such a dichotomy are exposed. A crucial difference lies in the assumptions about change in the causal processes generating economic outcomes, especially asset returns. Furthermore, this article insists on providing conceptual definitions of key terms that have distinct meanings within the two research programs.

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We use an extensive data set of bilateral exposures on credit default swap (CDS) to estimate the impact on collateral demand of new margin and clearing practices and regulations. We decompose collateral demand for both customers and dealers into several key components, including the "velocity drag" associated with variation margin movements. We demonstrate the impact on collateral demand of more widespread initial margin requirements, increased novation of CDS to central clearing parties (CCPs), an increase in the number of clearing members, the proliferation of CCPs of both specialized and non-specialized types, and client clearing. Among other results, we show that system-wide collateral demand is increased significantly by the application of initial margin requirements for dealers, whether or not the CDS are cleared. Given these dealer-to-dealer initial margin requirements, however, mandatory central clearing is shown to lower, not raise, system-wide collateral demand, provided there is no significant proliferation of CCPs. Central clearing does, however, have significant distributional consequences for collateral requirements across various types of market participants.

This paper provides evidence for the procyclicality of banks' credit risk by investigating the historical resilience of several European banking sectors before and after the 2008 banking crisis. It provides a decomposition of banks' probabilities of default between a solvency and a liquidity component. The results show a gradual build-up of fragilities before 2008 in most countries. Increased probabilities of default are shown to be mainly driven by a surge in liquidity risk, even when shocks of relatively low magnitude are imposed on the system.

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