Essays on Financial Intermediation

Chapter 1 investigates a regulatory spillover effect of the Basel III liquidity standard on the real economy through a series of difference-in-difference estimations. Since the Basel Committee’s official endorsement for the new liquidity regulation in December 2010, a bank exposed to high liquidity risk reduced its loan proportion significantly, making a negative real effect on its surrounding economy via a bank-lending-channel. The new regulation also induced a bank with a weak liquid balance sheet to raise its deposit rate aggressively, generating a liquidity problem in a nearby local bank through a deposit-competition-channel and ultimately curbing an expansion of the local bank\u27s credit supply to the economy In Chapter 2, we introduce a novel measure of decision-making delegation within banks based on whether individual branches have the authority to set their own deposit rates (co-authored with Jennifer Dlugosz, Radhakrishnan Gopalan and Janis Skarastins). Using natural disasters as shocks to local economies, we show that this aspect of bank organizational structure has real effects. Branches that set rates locally increase deposit rates more and experience larger increases in deposit volumes in affected counties following a disaster. Banks with more branches setting rates locally expand mortgage lending more rapidly in affected counties. House prices recover more quickly in affected MSAs with more branches setting rates locally. These effects are distinct from those captured by other commonly used measures of decision-making delegation like bank size or “localness”. Our paper highlights the role that delegation of deposit funding decisions has on bank behavior and local economic outcomes. In Chapter 3, I ask what caused a bank’s failure in managing its liquidity risk at the outset of the 07-09 financial crisis? This paper finds the answer from a change in a bank’s exposure to an inter-bank network by developing a theory model and conducting an empirical test. As a bank gains an easier access to a wide inter-bank funding network, the bank tends to manage its liquidity risk less strictly in order to make the best use of its profit opportunity while being less concerned about its potential funding difficulty. Once a negative shock occurs, however, the inter-bank financing suddenly stops functioning due to an increased uncertainty in the network, generating a serious liquidity problem especially to a bank connected to the big networ

Bank partnership and liquidity crisis

This study empirically investigates the relationship between banking integration and liquidity management. To measure banks’ connectivity, we use the number of partnerships proxied via the syndicated loan arrangements in which they serve as lead arrangers. If banks establish more business partnerships through syndicated loan arrangements, those under market stress are more likely to face increased funding costs, create reduced liquidity, and originate declined small business loans and mortgages. Those banks with more partners are shown to have a lower liquidity coverage ratio, suggesting that business partnerships create a disincentive toward liquidity risk management

US National Banks and Local Economic Fragility

We examine the relationship between US national banks' local market shares and the economic fragility of the counties in which they operate. We find that counties with national banks that have large local market shares experience a greater fluctuation in their income growth in the subsequent year. Further, an increase in income growth is more pronounced during normal times but declines significantly in a distressed market. We further find that the national banks create greater liquidity during normal times and lower liquidity in distressed times. Overall, our results indicate that national banks may expose local economies to macro-level distress

US national banks and local economic fragility

We examine the relationship between US national banks’ local market shares and the economic fragility of the counties in which they operate. We find that counties with national banks that have large local market shares experience a greater fluctuation in their income growth in the subsequent year. Further, an increase in income growth is more pronounced during normal times but declines significantly in a distressed market. We further find that the national banks create greater liquidity during normal times and lower liquidity in distressed times. Overall, our results indicate that national banks may expose local economies to macro-level distress.</p