Meet Martin Waibel: from Swedish House of Finance to the U.S. Fed

jun. 18, 2024

Martin Waibel, a PhD student at the Swedish House of Finance, studies the impact of post-crisis bank regulations on intermediation in over-the-counter markets. This fall, he will join the Federal Reserve Board as an Economist in the Monetary Affairs Division, focusing on financial intermediary analysis.

Can you explain your research?

My research focuses on topics at the intersection of empirical asset pricing and empirical corporate finance, with a focus on financial intermediation, market microstructure, and machine learning applications. My latest research examines the impact of post-crisis bank regulations on intermediation activity in over-the-counter markets, where market functioning critically depends on intermediaries' market-making capacity.

In several of my projects, I leverage regulatory transaction data to advance our understanding of this relationship. Specifically, I study how different instruments of the Basel regulations affect the intermediation capacity of regulated intermediaries, their spillover effects on the behavior and performance of unregulated market participants, and the ultimate impact on liquidity and returns.

What inspired you to pursue a PhD in Finance at the Stockholm School of Economics?

It was the exceptional faculty at the Swedish House of Finance that drew me to the Stockholm School of Economics. During my time at the European Central Bank, prior to starting my Ph.D., I already came across the work of several faculty members in the department. The academic environment, combined with the well-developed course structure during the first two years of the Ph.D., convinced me that the program offered at the Stockholm School of Economics provides a solid foundation for a Ph.D. Another important contributing factor was the excellent funding environment from the first year onward, which allows students not only to attend conferences but also to maintain a good standard of living throughout the Ph.D.

What specific experiences or interests guided you towards your research in financial intermediation and market microstructure?

My interest in studying financial intermediation in the context of decentralized financial markets was sparked during my time at the European Central Bank. Back then, I worked on topics related to dislocations in key funding markets, such as the repo market, which are crucial for monetary policy.

These dislocations, discussed in the context of the post-crisis regulatory toolkit, inspired me to understand the underlying mechanisms of financial markets and the impact of regulations on market behavior and efficiency. During my Ph.D. studies, I then attended several courses focused on this area, particularly through the excellent summer course program offered at the Swedish House of Finance.

How do you think your findings could inform regulatory bodies?

My research highlights how key Basel regulatory tools—the Basel capital ratio and the Basel leverage ratio—have impacted the intermediation capacity of heterogeneously regulated dealers in over-the-counter markets.

While dealers are traditionally understood as the customary intermediaries in these markets, more frequent liquidity shortages in the recent years have challenged this view. Against this background, my work documents that after the introduction of leverage ratio constraints, bank-affiliated dealers increasingly withdraw from liquidity provisioning, particularly in safe bonds and during periods of regulatory pressure.

In response, nonbank institutions, and in particular bond mutual funds, have engaged in more liquidity provision in safe bonds, which are particularly constrained by non-risk-weighted leverage regulation.

We show that this has important implications for regulators: While bond mutual funds’ liquidity supply stabilizes corporate bond markets on average, the more prominent role of open-ended institutions in corporate bond liquidity supply may have made safe corporate bonds more exposed to redemptions from the bond mutual fund industry. This suggests that leverage regulation has made safe corporate bonds more volatile. Eventually, policymakers will have to consider these effects in their evaluation of leverage ratio requirements.

Congratulations on your new job at the Federal Reserve! How does this move align with your previous work and academic interests?

I am very enthusiastic about moving to the Federal Reserve Board. I will join the Board as an Economist in the Monetary Affairs Division, with a specific focus on financial intermediary analysis. Given the strong focus of my research on both bank and non-bank financial intermediaries, I am very much looking forward to the opportunity of working on highly policy-relevant issues in the field where I have built expertise over the past years.

In my new role, I am excited to continue working on topics regarding the impact of regulation on intermediation activity, particularly against the backdrop of a shadow banking sector that continues to grow in influence. Hence, to maintain an effective transmission of monetary policy while safeguarding the financial system, central banks and regulators need to continuously adapt their strategies. Understanding the associated costs and how to optimally design regulatory responses will motivate my research going forward. Additionally, I am enthusiastic about further developing my existing projects, such as those on machine learning in option markets.

Advice to someone considering a PhD in finance today? Are there particular skills or areas of knowledge they should focus on given the current economic landscape?

Throughout the past five years, I have experienced firsthand that the academic finance profession is very agile and ever evolving, reflecting the rapidly changing industry environment. This includes developments in artificial intelligence, consumer finance, online banking, central bank digital currencies, and more.

However, at the heart of all these developments lie fundamental concepts of finance. I believe that rationalizing how these concepts apply to developments in financial markets is where Ph.D. economists can add value. Yet, such a role requires a solid understanding of key concepts in financial economics.

I would recommend that anyone considering a Ph.D. in Finance select a program that starts with in-depth training in the core principles of economics and finance and gradually exposes students to the research frontier in specific fields while allowing them to acquire the specific technical skills needed for the question at hand. For the latter part, it is absolutely essential to be surrounded by a broad set of experienced academics who are leaders in their field.

Throughout my Ph.D., it also helped me to be routinely reminded by my advisors that a Ph.D. is a marathon, not a sprint. Hence, I would advise any student to really take the time to figure out their interests rather than settling on any topic too quickly.