Browsing by Subject "Banking"

Now showing 1 - 5 of 5
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    Essays On Banking
    (2019-06) Kishore, Kaushalendra
    This thesis consists of two essays. In the first essay I try to explain why risk managers exist and provide a reason for risk management failure. Banks rely on risk managers to prevent their employees from making high risk low value investments. Why can't the CEOs directly incentivize their employees to choose the most profitable investment? I show that having a separate risk manager is more profitable for banks and is also socially efficient. This is because there is conflict between proving incentive to choose the most profitable investment and providing incentives to exert effort on those investments. Hence, if the tasks are split between a risk manager who approves the investments and a loan officer (or trader) who exerts effort, then both optimal investment choice and optimal effort can be achieved. I further examine some reasons for risk management failure wherein a CEO may ignore the risk manager when the latter is risk averse and suggests safe investments. As is usually the case before a financial crisis, my model predicts that the CEO is more likely to ignore the risk manager when the risky investments are yielding higher profits. The second essay studies the impact of expectation of bailout of a credit insurance firm on the investment strategies of the counterparty banks. If the failure of credit insurance firm may result in the bankruptcy of its counterparty banks, then the regulator will be forced to bail it out. This imperfectly targeted time inconsistent policy incentivizes the banks to make correlated investments ex ante. All banks want their assets to fail exactly at the time when the bailout is occurring to indirectly benefit from the bailout of the insurance firm and hence they make correlated investments. I build a model in which correlated investment by banks, under priced insurance contracts and a systemically important insurance firm arise endogenously and show that while credit insurance helps in risk sharing during good times, it can also create systemic risk. I also show that putting a limit on size of insurance firm can mitigate this problem.
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    A firm foundation: essays on firm choice
    (2014-12) Hill, Enoch Stanley
    This dissertation consists of three essays.In the first essay, Kai Ding and I develop a dynamic general equilibrium model in which a change in the importance of firm specific human capital can explain the new pattern in labor productivity as well as partially account for the decrease in the rate of employment recovery (jobless recoveries) observed in the most recent three recessions. Additionally, we present empirical support that the importance of firm specific human capital has in fact increased for recent recessions.In the second essay, David Perez-Reyna and I incorporate theft in a macroeconomic setting with the goal of understanding the effects of public law enforcement (PLE) on the incarceration rate, aggregate output and average welfare. Our primary finding is that there exists a non-monotonic relation between the level of PLE and all three of these aggregate variables. In particular, for countries with relatively small amounts of PLE, there is an inverse relationship between PLE and both aggregate production and welfare primarily due to an increase in the incarceration rate. However, for countries with higher levels of PLE, the level is positively related to production and welfare and inversely related with the incarceration rate. When applied to a dynamic model, our mechanism can explain why we observe such a large difference in the level of PLE across countries.In the third essay, David Perez-Reyna and I present a general equilibrium model where heterogeneous consumers endogenously choose whether to become workers, consumers or entrepreneurs in order to analyze how limits on the leverage of banks affect real output. In our model tighter limits on the leverage of banks cause an increase in the spread between the interest rate that banks charge for loans and the interest rate that banks pay for deposits. A higher spread results in two types of distortions: First, firms with the same productivity will have different size. Second, productive firms will cease to exist, while nonproductive ones will enter. These distortions result in lower production.
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