Stefano Pietrosanti

Stefano Pietrosanti
Job Market Paper

The impact of bank regulation on the cost of credit: Evidence from a discontinuity in capital requirements (with Emilia Bonaccorsi di Patti and Mirko Moscatelli)

We study the effect of a change in minimum capital requirements on the cost of credit. We exploit a reduction of the risk weight applied to loans to small and medium enterprises, whose exposure is below a threshold (the Small and Medium Enterprises Supporting Factor). Employing a regression discontinuity design and matched bank-firm data from the Italian Credit Register, we infer an average reduction in interest rates of 9.5 basis points per percentage point drop in minimum capital requirements.  We also find that the estimate of the effect is larger, between 12.5 and 15.5 basis points per percentage point change, for borrowers that have low costs of switching between banking relationships. We interpret this result as evidence that the pass-through of capital discounts to borrowers depends on the extent to which banks exercise monopoly power. We suggest that competition between lenders is important for the effectiveness of changes in banks’ capital buffers as a macro-prudential policy tool.

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Other Research

Bank specialization and the design of loan contracts (with Marco Giometti)

Using data on the US syndicated loan market, we show that banks specialize in lending towards specific industrial sectors. Specialization is persistent over time and common across industries. This contrasts naive interpretations of classical theories of financial intermediation built upon portfolio diversification. Using detailed information on credit agreements, we show that the typical loan contract between a bank specialized in an industry and a firm in the same industry has less restrictive covenants and lower spreads. This, with respect to a loan arranged by the same bank, at the same time, to a firm in another industry in which the bank is not specialized in. This result cannot be fully explained by relationship lending, high propensity to internalize spillovers from credit decisions within an industry, or geographical proximity. Interpreting our findings in light of the information theory of covenants, we suggest that the lending advantage associated with bank specialization is likely to stem from an information advantage in screening and monitoring.

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Justifying the Glass-Stegall Act: Underwriter competition and risk taking in the 1920s (with Marc Flandreau)

The Glass-Steagall Act of 1933 forced commercial banks out of security underwriting. Past empirical work has questioned Glass-Steagall on the grounds that there is no evidence that commercial banks acted any more recklessly than investment banks before the 1929 crisis. We return to this question using new and detailed data on the underwriting of government securities. We suggest that banking competition combined with different supervisory regimes for certain commercial banks resulted in perverse incentives for investment banks to lower lending standards. Commercial banks that were both State chartered and FED members enjoyed laxer regulation and the FED liquidity backstop insurance. We show evidence that these banks engaged in riskier lending and put pressure on lending standards at large. In our novel reading of Glass-Steagall, the exclusion of commercial banks from underwriting does make sense, as part of a comprehensive package of reforms meant to remedy regulatory spillovers, and level conditions for all banks within each market.

Entrepreneurial selection and the quality of enforcement: Theory and evidence from court district borders

Using Bruegel data on European manufacturing firms (EFIGE) I document that only in Italy the presence of an old (over-65-year-old) manager is associated with a higher probability of obtaining credit.  I argue that this is a consequence of long case processing time of Italian courts. Court slowness makes loan recovery more difficult, thus soft relationships more valuable. This may induce an incumbent advantage and explain at least in part the prevalence of old managers in Italy. I introduce a static general equilibrium model of firm allocation explaining how incumbent advantage, caused by difficulty in accessing credit for new managers, can sustain firm misallocation. I use this model to determine in which cases the presence of such frictions in access to funding can justify subsidies to young managers and entrepreneurs. Finally, I investigate the causal relationships between firm allocation, credit access and the quality of courts using the variation in enforcement quality at Italian court districts’ borders.

Teaching Experience

Undergraduate:

Macro-Modeling, University of Pennsylvania,Teaching Assistant for Prof. Guillermo Ordóñez (Fall 2018)

Intermediate Microeconomics, University of Pennsylvania, Teaching Assistant for Prof. Kenneth Burdett (Spring 2016)

Intermediate Microeconomics, University of Pennsylvania, Teaching Assistant for Prof. Rakesh Vohra (Fall 2015)

 

Other Information

Professional Activities

Referee for Review of Economic Dynamics, International Economic Review

Interests

Banking, Empirical Corporate Finance, Macroeconomics

Phone

+1 (267) 357-2352

Email

stefanop@sas.upenn.edu

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Advisors

Guillermo Ordonez

Michael Roberts

References

Professor Guillermo Ordóñez (Advisor)

Department of Economics

University of Pennsylvania

(+1) 215-898-1875

ordonez@econ.upenn.edu

 

Professor Michael R. Roberts (Advisor)

Finance Department, The Wharton School

University of Pennsylvania

(+1) 215-573-9780

mrrobert@wharton.upenn.edu

 

Alessandro Dovis

Department of Economics

University of Pennsylvania

(+1) 215-898-5421

adovis@econ.upenn.edu

 

Marc Flandreau

Department of History

University of Pennsylvania

(+1) 215-593-8977

mfl@sas.upenn.edu

 

Petra Todd

Department of Economics

University of Pennsylvania

(+1) 215-898-5421

ptodd@econ.upenn.edu

 

Job Market Candidate Status
I am on the job market and I will be available for interviews at the ASSA 2020 Annual Meeting in San Diego, and the 2019 European Winter Meeting of the Econometric Society in Rotterdam.