Essays on Bank Regulation and Risk

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Essays on Bank Regulation and Risk

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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.


University of Minnesota Ph.D. dissertation. 2021. Major: Economics. Advisor: Ellen McGrattan. 1 computer file (PDF); 79 pages.

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Pandolfo, Jordan. (2021). Essays on Bank Regulation and Risk. Retrieved from the University Digital Conservancy,

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