Ye Li, Assistant Professor, U Washington/Visiting Assistant Professor, U Penn/Wharton. Columbia PhD 2012-2017
with Wenhao Li, updated Jan. 2024, R&R at the Review of Economic Studies SSRN
Abstract: A salient trend in crisis intervention has emerged in recent decades: Government and central banks offered funding directly to nonfinancial firms, bypassing banks and other credit intermediaries. We analyze the long-term consequences of such policies by focusing on firm quality dynamics. In a laissez-faire economy, firms with high productivity are more likely to survive crises than those with low productivity. The government provides funding support to save more firms but cannot customize it based on firm productivity, dampening the cleansing effect of crises. The policy distortion is self-perpetuating: A downward bias in firm quality distribution necessitates interventions of greater scale in future crises. Our mechanism is quantitatively important: We show that if policy makers ignore the distortionary effects on firm quality dynamics, the resultant credit intervention would almost double the optimal amount.
Selected Presentations: 2023: AFA;
BSE (Barcelona School of Economics) Summer Forum, HEC-McGill Winter Finance Workshop, MFA; 2021: Colorado Finance Summit, FTG (Finance Theory Group), IMF, Liquidity in Macroeconomics Workshop, Paris December Finance Meeting, SAIF, SFS Cavalcade North America, USC Marshall
with Yi Li, Huijun Sun, updated, Dec. 2023, SSRN
Abstract: The circulation of deposits as means of payment churns reserves—the settlement assets—among banks. A bank's position in the network of payment flows determines its liquidity risk from depositors' payment activities and its willingness to fund illiquid loans with deposits. We develop a model of liquidity percolation in the payment system and a modern version of money multiplier that links the payment-induced redistribution of liquidity and equilibrium level of bank credit funded by deposits. Using transaction-level data on payment settlement, we estimate the model and identify a subset of banks that have disproportionately large impact on the equilibrium outcome due to their systemically importance in the payment network.
Selected presentations: Advances in Macro-Finance Tepper-LAEF Conference, Boston College (Carroll), BSE (Barcelona School of Economics) Summer Forum, CESifo, European Banking Center Network Conference at Tilburg, ECB research seminar, European Finance Association, Frankfurt School of Finance & Management, Imperial College London finance seminar, NYU Econ/Stern macro seminar, Stanford University finance seminar, UCLA Anderson finance seminar, UNC Junior Roundtable, University of Zurich research seminar
with Yi Li, updated ,Oct. 2023, SSRN
Abstract: Banks finance lending with deposits and support the operation of payment system by allowing depositors to freely transfer funds in and out of their deposit accounts. This bundling of financial services creates a liquidity mismatch. Using granular payment data, we characterize a sizeable liquidity risk exposure that banks face due to highly volatile payment flows. Payment risk is a form of funding stability risk that is unique to banks. Our analysis demonstrates the tension between the monetary role and financing role of deposits. We find that payment risk dampens bank lending: An interquartile increase in payment risk is associated with a decline in loan growth that is 10%-20% of its standard deviation. This detrimental effect is amplified by funding stress in broader financial markets and is stronger for undercapitalized banks. Furthermore, payment risk impedes the bank lending channel of monetary policy transmission. Finally, we characterize how banks mitigate payment risk by adjusting deposit rates.
Selected presentations: Adam Smith Workshop, Bank of Canada, Barcelona School of Economics Summer Forum, Chicago Fed, Columbia Business School, European Finance Association, FDIC, Federal Reserve Board, Indiana University, Northeastern University Finance Conference, Notre Dame, OCC Symposium on Systemic Risk and Stress Testing, Purdue University, SFS Cavalcade North America, UIUC, Wash U St. Louis
Patrick Bolton, Neng Wang, Jinqiang Yang, updated Oct. 2023, accepted at the Journal of Finance, NBER, SSRN
Abstract: We propose a theory of banking in which banks cannot perfectly control deposit flows. Facing uninsurable loan and deposit shocks, banks dynamically manage lending, wholesale funding, deposits, and equity. Deposits create value by lowering funding costs. However, when the bank is undercapitalized and at risk of breaching leverage requirements, the marginal value of deposits can turn negative as deposit inflows, by raising leverage, increase the likelihood of costly equity issuance. Banks' inability to fully control leverage distinguishes them from non-depository intermediaries. Our model suggests a re-evaluation of leverage regulations and offers new perspectives on banking in a low interest-rate environment.
Selected presentations: 2022: European Winter Finance Summit, Financial Intermediation Research Society (FIRS) Conference; 2021: Cambridge Corporate Finance Theory, CICF, CICM, EFA (European Finance Association), Federal Reserve Board, International Association of Deposit Insurers (IADI) Conference, NBER Summer Institute, MFA, NFA, Short-Term Funding Markets, SED (Society for Economic Dynamics), Rochester, U Washington; 2020: BI-SSE Conference on Asset Pricing & Financial Econometrics, CESifo Macro Money & International Finance, Fudan U, OSU Fisher, Washington University in St. Louis (WUSTL) Corporate Finance Conference.
Accepted at the American Economic Review, Dec. 2022,
Abstract: The transition towards an intangible-intensive economy reshapes financial system by creating a self-perpetuating savings glut in the production sector. As intangibles become increasingly important, firms hoard liquidity to finance investment in intangibles of limited pledgeability. Firms' savings feed cheap leverage to financial intermediaries and allow intermediaries to bid up asset prices, which in turn encourages firms to save more for asset creation. This paper develops a macro-finance model that offers a coherent account of the rising corporate savings, debt-fueled growth of intermediaries, declining interest rates, and rising asset valuation. Along these secular trends, endogenous financial risk accumulates.
Selected presentations: CEPR ESSFM Gerzensee, Cornell Johnson, CUHK, EFA (European Finance Association), European Winter Finance Summit (Best Paper Award), HKUST Macro Workshop, Temple U Fox, U Calgary Haskayne, WFA
Edward Denbee, Christian Julliard, Kathy Yuan, Journal of Financial Economics, Volume 141, Issue 3, Sep. 2021 (Lead Article), JFE, SSRN
Abstract: Using a structural model, we estimate the liquidity multiplier of an interbank network and banks’ contributions to systemic risk. To provide payment services, banks hold reserves. Their equilibrium holdings can be strategic complements or substitutes. The former arises when payment velocity is high and payments begets payments. The latter prevails when the opportunity cost of liquidity is large, incentivizing banks to borrow neighbors’ reserves instead of holding their own. Consequently, the network can amplify or dampen individual shocks. Empirically, network topology explains cross-sectional heterogeneity in banks’ contribution to systemic risks while changes in the equilibrium type drive the time-series variation.
Selected presentations: Bank of Canada, Bank of England, Fed/OFR Financial Stability Conference, MFS (Macro Finance Society), LSE, NBER Summer Institute, OSU Fisher, Short-Term Funding Markets, Stockholm School of Economics, WFA; Grant: Foundation Banque de France Research Grant
Lin Will Cong, Neng Wang, Review of Financial Studies,
Volume 34, Issue 3, Mar. 2021 (Editor's Choice), RFS,
Abstract: We develop a dynamic asset-pricing model of cryptocurrencies/tokens that allow users to conduct peer-to-peer transactions on digital platforms. The equilibrium value of tokens is determined by aggregating heterogeneous users' transactional demand rather than discounting cashflows as in standard valuation models. Endogenous platform adoption builds upon user network externality and exhibits an $S$-curve - it starts slow, becomes volatile, and eventually tapers off. Introducing tokens lowers users' transaction costs on the platform by allowing users to capitalize on platform growth. The resulting intertemporal feedback between user adoption and token price accelerates adoption and dampens user-base volatility.
Selected presentations: Ant Financial (Alibaba Group), Atlanta Fed, CEPR ESSFM Gerzensee, Chicago Booth, CKGSB, Finance UC Chile, FTG (Finance Theory Group), Georgetown McDonough, RCFS/RAPS Conf. at Baha Mar, SEC, Stanford SITE, UT Dallas Fall Finance Conf., Tsinghua, U Washington Foster, U Zurich/ETH; Awards: AAM-CAMRI-CFA Institute Prize in Asset Management, CME Best Paper Award (Emerging Trends in Entrepreneurial Finance)
with Simon Mayer, Dec. 2021,
Abstract: Stablecoins are at the center of debate surrounding decentralized finance. We develop a dynamic model to analyze the instability mechanism of stablecoins, the complex incentives of stablecoin issuers, and regulatory proposals. The model rationalizes a variety of stablecoin management strategies commonly observed in practice and characterizes an instability trap: Stability lasts for long time, but once debasement happens, price volatility persists. Capital requirement improves price stability but fails to eliminate debasement. Restricting the riskiness of reserve assets can surprisingly destabilize price. Finally, data privacy regulation has an unintended benefit of reducing the price volatility of stablecoins issued by data-driven platforms.
Selected presentations: 2022: ABFER, AFA, GSU-RFS Fintech Conferecen, MFA, Purdue Fintech Conference, Utah Winter; 2021: Bank of Finland/BIS Economics of Payments, CESifo Macro Money & International Finance, CICF, Duke Fuqua, ECB Money Market Conf., Econometric Society, Hogeg Blockchain Institute Conf., Purdue Fintech Conference, Stanford SITE, U Amsterdam