Camilo BotíaPhD candidate in Finance
Carnegie Mellon University
Tepper School of Business
5000 Forbes Avenue
Pittsburgh, PA 15213
camilobotia at cmu dot edu
Vita / Resume
I study the effects of disclosing financial information on the occurrence of bank runs and on management risk-taking activities. The main trade-off is between the risk of bank runs, which increases with a disclosure delay, and managerial incentives for risk taking, which runs discipline. I find that the main policy consideration is the growth rate of bank assets. If bank assets grow sufficiently slowly, then the optimal policy is to disclose with a lag, in order to balance managerial risk taking and creditors' coordination problems. When bank assets have high-growth rates, a disclosure lag increases the occurrence of runs and decreases bank value.
Presented at: Carnegie Mellon. LBS (2016 TADC). Olin Business School. 16th SAET Meetings. EFA Doctoral Tutorial 2016.
I study how the disclosure of discount window participants’ information affects the provision of managerial incentives and whether the disclosure could trigger bank runs. I propose a model in which banks suffer adverse shocks that require cash infusion in order to continue operating and assets are subject to managerial moral hazard. The bank is financed by depositors who can withdraw at any time, introducing a collective action problem. I provide conditions that characterize whether disclosure or confidentiality of discount window borrowings maximizes the NPV of bank projects. The main result states that the benefits of disclosure outweigh the costs when moral hazard is serious relative to the size of the liquidity shock, because disclosure allows a contract that induces the banker to exert effort. The benefits of secrecy outweigh the costs when moral hazard is small relative to the liquidity shock, because a costly run is avoided.
Presented at: Carnegie Mellon.
Contingent capital is long term debt that converts to equity under specific conditions. Contingent capital has been proposed as resolution mechanism of distressed financial firms. The idea is that financial firms would be required to issue these convertible bonds and if the bank is hit by a crisis, the automatic conversion of debt into equity would solve the undercapitalization problem without requiring a bailout from the government. There are two main elements that are important for the design of these convertible bonds: the rate at which debt converts to equity and the stock price level that triggers the conversion. I study how creditors' incentives to run interact with the rate of debt conversion and the stock price level that triggers the conversion. The main result shows that for contingent capital to actually reduce the bank run probability, both the rate of conversion and the price level need to be high enough. My research shows that contingent capital reduces the run probability by making creditors feel safe as the bank fundamentals deteriorate. Under these conditions, the maturity of contingent capital bonds can be reduced.
Presented at: Carnegie Mellon.