Essays on Bank Behaviour and Financial Regulation
Document information
| Author | Matic Petriček |
| School | European University Institute |
| Major | Economics |
| Year of publication | 2019 |
| Place | Florence |
| Document type | thesis |
| Language | English |
| Number of pages | 67 |
| Format | |
| Size | 3.33 MB |
- Bank Behaviour
- Financial Regulation
- Monetary Policy
Summary
I. Bank Funding and Risk Taking
The first section of the thesis delves into the bank funding mechanisms and their influence on risk-taking behavior. It introduces a novel approach to address endogeneity issues in estimating the causal effects of leverage on risk-taking. The analysis utilizes local bank office deposits and unemployment data to construct an instrument for regression analysis. The findings suggest that banks tend to increase their risk-taking following an exogenous increase in leverage, aligning with theoretical predictions. This section emphasizes the importance of understanding how leverage impacts bank behavior, particularly in the context of financial stability. The implications of these findings are significant for regulators and policymakers, as they highlight the need for careful monitoring of leverage levels within banks to mitigate potential risks to the financial system.
1.1 Introduction
The introduction sets the stage for the exploration of bank behavior in response to financial regulation. It outlines the objectives of the research and the relevance of studying the interplay between financial regulation and bank risk-taking. The introduction also highlights the significance of the research in contributing to the existing literature on banking and finance, particularly in understanding how regulatory frameworks can shape bank behavior.
1.2 Literature Review
The literature review synthesizes existing research on bank behavior and financial regulation. It identifies gaps in the literature, particularly regarding the causal relationships between leverage and risk-taking. The review underscores the importance of empirical studies in informing regulatory practices and enhancing the understanding of how banks respond to changes in the regulatory environment. This section serves as a foundation for the subsequent analysis, providing context and justification for the research conducted.
II. Deposit Insurance and Bank Risk Taking
The second section examines the role of deposit insurance in influencing bank risk-taking behavior. It presents an experimental setup that exploits an increase in the coverage limit of deposit insurance in the U.S. to identify differences in risk-taking between affected and unaffected banks. Contrary to existing literature, the findings indicate that an increase in deposit insurance did not lead to heightened risk-taking among banks. This challenges the conventional wisdom that moral hazard is an inevitable consequence of deposit insurance. The analysis emphasizes the need for a nuanced understanding of how deposit insurance frameworks can be designed to minimize risks while ensuring financial stability.
2.1 Introduction
The introduction to this section outlines the theoretical underpinnings of deposit insurance and its intended purpose in safeguarding depositors. It highlights the potential for moral hazard and the implications for bank behavior. The introduction sets the context for the empirical analysis that follows, emphasizing the importance of understanding the real-world effects of deposit insurance on bank risk-taking.
2.2 Data and Methodology
This subsection details the data sources and methodologies employed in the analysis. It describes the criteria for selecting banks and the statistical techniques used to isolate the effects of deposit insurance on risk-taking behavior. The rigorous methodology enhances the credibility of the findings and provides a robust framework for understanding the dynamics of deposit insurance and bank behavior.
III. Monetary Policy and Local Economic Outcomes
The final section investigates the impact of monetary policy on local economic outcomes, particularly in relation to the characteristics of banks operating in specific geographical areas. The analysis reveals that the effects of monetary policy on local employment and payroll are intensified when the capital structure of local banks improves. This finding underscores the critical role that healthy banks play in facilitating economic growth, especially during periods of monetary tightening. The results suggest that policymakers should consider the health of local banks when designing monetary policy interventions, as their capacity to support local economies is closely linked to their financial stability.
3.1 Introduction
The introduction to this section highlights the significance of understanding the relationship between monetary policy and local economic outcomes. It emphasizes the need to consider the characteristics of local banks in assessing the effectiveness of monetary policy. This sets the stage for a detailed analysis of how monetary policy interacts with bank behavior and local economic dynamics.
3.2 Findings and Implications
This subsection presents the key findings of the analysis, emphasizing the importance of bank characteristics in mediating the effects of monetary policy. The implications for policymakers are discussed, particularly in terms of ensuring that local banks are adequately capitalized to support economic growth. The findings contribute to the broader discourse on the interplay between banking, regulation, and economic stability.
Document reference
- Bank Funding and Risk Taking (Matic Petriček)
- Deposit Insurance and Bank Risk Taking (Matic Petriček)
- Examining Board (Prof. Juan Dolado, Universidad Carlos III de Madrid)
- Examining Board (Prof. Árpád Ábrahám, EUI)
- Examining Board (Prof. Tobias Berg, Frankfurt School of Finance & Management)