Essays on Stability and Regulation of the Banking System
Open Access
- Author:
- Shakya, Shasta
- Graduate Program:
- Business Administration
- Degree:
- Doctor of Philosophy
- Document Type:
- Dissertation
- Date of Defense:
- May 16, 2018
- Committee Members:
- Jingzhi Huang, Dissertation Advisor/Co-Advisor
Jingzhi Huang, Committee Chair/Co-Chair
Jess Cornaggia, Committee Member
Joel Matthew Vanden, Committee Member
Brent William Ambrose, Outside Member
Fenghua Song, Committee Chair/Co-Chair - Keywords:
- Financial stability
connectedness
liquidity requirements
liquidity creation
contagion
banking regulation - Abstract:
- This dissertation consists of three chapters each of which explores different topics in the area of banking. In the first chapter, I ask how a bank’s connectedness affects its financial stability and what mechanisms amplify or mitigate this effect. I consider connectedness arising due to linkages that are formed between banks when they are exposed to common housing markets, and investigate whether such connectedness explains stability around the 2007 housing crash. I show that linkages facilitate contagion of risk, and that high leverage and securitization activity of other banks amplify contagion while high liquidity ratio of other banks minimizes contagion. Finally, I provide policy implications by suggesting minimum levels of capital and liquidity ratios that could contain contagion. In the second chapter, I study the impact of a newly introduced liquidity requirement in the banking sector – the Liquidity Coverage Ratio (LCR) rule – on loan contract terms. This chapter employs a differences-in-differences testing method, and exploits the setting of multiple events arising from the timing of the implementation of the rule to identify the effect of LCR. I do not find evidence of high costs to lenders due to this rule, because loan pricing terms do not change in an average loan post LCR. However, banks limit their risk exposure by increasing collateral requirements. For banks that are ex-ante expected to find the rule less costly, I find evidence of cost savings because they offer lower spreads. Further results suggest that while banks provided extra benefits to relationship borrowers in the form of lower spreads pre LCR, this is no longer true post LCR, and they reduce risk exposure to borrowers with weaker relationship strength by increasing collateral requirements. In the third chapter, I study the relationship between liquidity created by a bank and its overall financial stability. I contrast results during the period of 2007 financial crisis with those during normal times. While I find that overall liquidity creation is a risky activity during both times, breaking it into different components (on- vs. off-balance sheet, asset side vs. liability side) reveals nuances on the driving forces behind this relationship. While asset side liquidity creation decreases stability during both times, results show that the effects of other components depend on overall market conditions. During the crisis period, off-balance sheet liquidity creation hurts stability, while it has no apparent benefit during normal times. Liability side liquidity creation improves stability during crisis, however there is evidence of costs of such activity during normal times. Further results show that liquid holdings and core deposits can mitigate the costs of liquidity creation during crisis without significantly hurting benefits during normal times.