UCLA

This dissertation studies how market expectations of systemic bailouts affect credit recoveries, how countries' macro-fiscal conditions change around fiscal distress, and how banking crises and fiscal crises interact with each other and restrict economic recoveries. Chapter 1 is written based on my job market paper. Using daily put options data of U.S. bank holding companies, I measure each bank holding company's exposure to the systemic bailout factor, which is the sensitivity of each bank's out-of-the-money put option price to the variations of sector-wide put option basket-index spreads. I show that low market expectations of the banking sector systemic bailouts played a significant role in the weak bank credit recovery after the subprime crisis. Bank holding companies with higher pre-crisis exposure to the systemic bailout factor experienced larger post-crisis deviations from the pre-crisis bank credit growth trend. Perhaps surprisingly, such pattern is persistent even for banks that are less affected by the post-crisis financial regulations and less exposed to borrowers from the deteriorating sectors. Furthermore, I drill down to the commercial bank subsidiary level data while controlling for parent bank holding company fixed effects. This analysis reveals that commercial bank subsidiaries within the same bank holding company present same credit growth patterns even though they have different exposure to financial regulations and deteriorating sectors. Chapter 2 is coauthored with my colleague at the International Monetary Fund. We present a new database of fiscal crises covering different country groups, including low-income developing countries (LIDCs) that have been mostly ignored in the past. We find countries faced on average two crises since 1970. We also shed some light on policies and economic dynamics around crises. Surprisingly, advanced economies face greater turbulence, with half of them experiencing economic contractions. Fiscal policy is usually procyclical around fiscal crises and we also find that the decline in economic growth is magnified if accompanied by a financial crisis. Chapter 3, which is coauthored with my advisor, Aaron Tornell, studies the interplay between banking crises and fiscal crises when the government exhausts fiscal space to clear up banking sector non-performing loans. Exploiting a newly constructed data set on various fiscal costs of resolving non-performing loans, we find banking crises accompanied with fiscal distress could dampen the positive growth effects related with active non-performing loans resolutions conducted by government. We empirically show that, depending on the timing of banking crises and fiscal crises, such disruptive effects are the result of either lacking fiscal policy space or the bank-sovereign nexus. However, immediate government response to restore fiscal space or regain access to international capital markets could help enhancing medium-term output and credit recoveries even after banking-fiscal twin crises.