Browsing by Subject "Liquidity"

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    Essays on Bank Regulation and Risk
    (2021-05) Pandolfo, Jordan
    This dissertation consists of three chapters. In Chapter 1, Economics of Banking and Regulation, I provide an overview of the academic literature at the intersection of banking and regulation, as it pertains to content in the following chapter. Chapter 2, Bank Regulation: Capital and Liquidity Requirements, is motivated by the 2010 Dodd-Frank Act which introduced a new set of capital and liquidity standards for U.S. commercial banks. Given the novelty of liquidity regulation, less work has focused on the joint role of capital and liquidity requirements in achieving policy objectives, as well as their interaction. To address this, I develop a quantitative general equilibrium model with a heterogeneous banking sector in which banks are subject to endogenous insolvency and liquidity default. Using panel microdata for U.S. commercial banks, I find that the Dodd-Frank Act led to a threefold reduction in bank default rates (from 0.93% to 0.23%) and was welfare improving. Further, I find significant policy interactions exist: capital requirements can reduce both insolvency and liquidity default. Given this feature, most of the welfare gains of the Dodd-Frank Act can be achieved just through the capital requirement component of the reform. I also solve for the jointly optimal policy and find that capital requirements should be increased and liquidity requirements decreased, relative to their Dodd-Frank levels. Chapter 3, Bank Profitability by Line of Business, addresses the feature that many banks are universal in the sense that they operate multiple lines of business (e.g. different lines for retail bank, commercial bank and investment bank activities). Using quarterly FR Y-9C reports, I examine how profitability covaries across business lines for U.S. commercial bank-holding companies (BHCs) over the period 2002-2020. Specifically, I partition bank revenue activity into commercial and investment bank business lines. While revenue line items are quite granular in the regulatory data, key expense categories (such as total compensation for employees) are aggregated at the BHC-level. I develop an empirical method to infer expenses by business line and therefore net income by business line, which is my main metric for profitability. Using this method, I find that commercial bank net income accounts for 55% of the aggregate banking sector net income, and this share has declined over time. In the aggregate, I find that commercial and investment bank net income are positively correlated (0.66). While commercial bank net income is pro-cyclical with the business cycle (0.44), investment bank net income is counter-cyclical (-0.09), suggesting a diversification benefit. Counter to aggregate measures, bank-level measures of net income correlation yield mixed results as to the sign and magnitude over the sampling period.
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    Essays on liquidity management and aggregate fluctuations
    (2013-07) Macera Carnero, Manuel Emilio
    This dissertation consists of two essays that focus on the role that frictions to inter-temporal exchange have in shaping the response of aggregate activity to exogenous changes in credit conditions. The first essay approaches this issue from a general equilibrium perspective. I study credit crises by considering the fact that they do not always affect all agents in the same manner. I show that during a household credit crisis, the more the productive sector saves, the more disruptive the contraction in household debt is. That is, the response of the economy is closely connected to the financial asset position of the productive sector, a statistic that can be calculated directly from aggregate data. An important feature of the model is that it is household debt, as opposed to household savings, which has a productive role. The low interest rates that ensue the contraction in household debt not only make investment cheaper, but also alter its composition. Consequently, capital ends being used in a less efficient manner, and the overall effect in economic activity is ultimately a quantitative issue. I solve the model numerically and perform a numerical evaluation of this novel channel. The second essay, co-authored with Maria Elisa Belfiori, provides a decision theoretical model of loan commitments, with the purpose of exploiting aggregate data on loan commitments to identify credit crunches. The usual difficulty for identification is that interest rate movements can be misleading due to the nature of credit markets. For instance, during a credit crunch, interest rates could go down just because funds \textit{flight to quality}, or because lending contracts are indexed to policy interest rates. We sidestep this problem by exploiting data on used of unused balances of loan commitments contracts. Commercial and Industrial Loans in the U.S. are predominantly implemented using these contracts. We study the evolution of the used and unused portions during the last recession to shed light on the origin of this episode. We find that the type of movements observed in aggregate data regarding aggregate quantities can indeed be consistent with real shocks.