Public defence in Economics, M.Sc (Econ.) Aleksi Paavola

Title of the thesis: Essays on Financial Intermediation and Monetary Policy Transmission

Doctoral student: Aleksi Paavola
Opponent: Professor Kari Heimonen, University of Jyväskylä
Custos: Professor Juuso Välimäki, Aalto University, Department of Economics 

Financial intermediaries such as banks and funds connect savers with borrowers. The three studies in Aleksi Paavola’s doctoral thesis study how the characteristics of intermediaries’ assets and liabilities affect investor behaviour, loan pricing and the functioning of money markets. Money markets are markets for short-term funding, and their functioning plays an important role in how, for example, central bank decisions are transmitted to the wider real economy.

The first study examines the 2016 reform of US money market funds. The reform changed the valuation and redemption rules of some fund shares. After the reform, downloads of regulatory reports describing fund portfolio holdings increased, especially for funds catering for institutional investors. Investor monitoring also increased when a fund's readily available assets approached the threshold to which potential redemption restrictions were tied. The findings support the interpretation that fund shares became less like bank deposits: investors wanted to know more about the assets held by the funds.

The second study examines the pricing of corporate loans granted by banks. In 2020, the Bank of Finland started to accept a wider range of corporate loans as collateral for central bank credit. Interest rates on newly eligible loans did not fall statistically significantly compared to otherwise similar loans. Earlier evidence from France found a decline in loan rates following a comparable easing of collateral rules. The difference suggests that the effect of collateral eligibility may depend on banks' funding needs more broadly and how easily they can pledge loans as collateral. At the same time, the result does not imply that broadening collateral eligibility was useless: the benefits of the change might have become apparent if financial market stress had intensified.

The third study analyses interbank funding using a theoretical model. In the model, bank risk makes unsecured lending more difficult, but banks can still lend to one another against collateral. Secured interbank lending can keep money markets functioning until banks in need of funds run out of collateral accepted in the market. They then turn to central bank funding, and borrowing costs across banks can diverge. The model helps interpret phenomena observed in euro area money markets and assess how different monetary policy measures would affect market functioning under different conditions.

The findings inform the design of fund regulations and central bank policy measures. A common conclusion is that financial intermediation is shaped even by seemingly small institutional details: how investors acquire information, which assets can be used as collateral for borrowing, and how the availability of unsecured and secured funding changes during periods of market stress.

Thesis available for public display 7 days prior to the defence at: https://aaltodoc.aalto.fi/sec/eonly/riiputus/?lang=en

Email: aleksi.m.paavola@aalto.fi

LinkedIn: https://www.linkedin.com/in/aleksi-paavola-a2b225aa/