Academic literature on the topic 'Economics ; Finance and Banking'

Thesis (Ph. D.)--Massachusetts Institute of Technology, Dept. of Economics, 2005.<br>Includes bibliographical references.<br>The first essay provides evidence that banks are liquidity constrained and hold private information about borrowers that hinders substitution of financing sources. Using loan level data from a public credit bureau and exploiting an exogenous shock to bank liquidity, I show that adverse selection prevents full arbitrage of profitable opportunities by competing lenders and thus liquidity constraints propagate to bank-dependent borrowers. The second essay evaluates a government program that targeted credit to small firms through existing financial intermediaries. Using the program eligibility rule to identify the effect on target firms, I find that target firms' total bank debt increased by 8 cents for every dollar of program financing provided to the banks. This effect is larger when the intermediary bank is more likely to lend to smaller firms according to observable bank characteristics. The third essay evaluates empirically the effect of credit history disclosure on the financial position of a sample of manufacturing firms in Argentina. Results indicate that credit history disclosure has a negative impact in the ability of firms to raise external finance when firms are exposed to a high liquidity risk.<br>by Daniel Paravisini.<br>Ph.D.

Thesis (Ph. D.)--Massachusetts Institute of Technology, Dept. of Economics, 2006.<br>Includes bibliographical references.<br>This dissertation consists of three essays that examine banking and corporate finance in developing countries. Specifically, it explores the theoretical and empirical implications of open capital markets, foreign bank entry, and the role of bond markets during banking crises. Chapter 1 analyzes the impact of opening capital markets using a theoretical model that incorporates both foreign and domestic lenders in the presence of asymmetric information. The model suggests that when foreign lenders are limited in their ability to obtain information about entrepreneurs, they may engage in cream-skimming by only targeting the largest, most profitable firms. This cream-skimming can induce a reallocation of credit that may either increase or decrease overall net output of the open economy. The consequences of this credit reallocation depend on the type of financial opening and the quality of domestic institutions. Chapter 2 examines the entry of foreign banks as a specific case of opening capital markets. I estimate the impact of entry using variation in the location of foreign banks established in India following a policy change in 1994. The estimates indicate that the 10 percent most profitable firms received larger bank loans, but that on average, firms were 7.6 percentage points less likely to have a loan after entry.<br>(cont.) The decline in loans was uncorrelated with firms' profitability and driven by a decrease among group-affiliated firms. The reallocation is consistent with the presence of asymmetric information, and similar estimates are obtained using the location of pre-existing foreign firms as an instrument for the location choice of new banks. Chapter 3, co-authored with Simon Johnson and Changyong Rhee, uses a quasi-natural experiment in Korea after the 1997-98 financial crises to assess bond markets in emerging economies. Evidence confirms that bond markets can develop quickly during a banking crisis and act as a 'spare tire' even when almost all previous private finance flowed through the banking system. However, access to bonds was feasible only for the largest firms, and there is no evidence that bond finance was better directed than bank finance. Firms with weaker pre-crisis corporate governance were no less likely to obtain bond financing.<br>by Todd A. Gormley.<br>Ph.D.

This work consists of five separate essays that examine the banking industry from a number of viewpoints. In the first essay, I consider how the ratchet effect interacts with workers' ability to cooperate to determine effort provision in teams. I show how the dominant constraint varies with both the size of the team and the members' ability to monitor each other's effort. Small teams tend to have their effort provision constrained by the ratchet effect; large teams are instead constrained by the inability of the team members to demand effort from each other. In the second essay, I examine the phenomenon of large team transfers in professional service firms, especially investment banks. I argue that large team moves occur because employees benefit by working with the most talented coworkers. Above-average teams may move together to effectively exclude younger, less-talented workers. These team transfers are optimal when employees are remunerated with team-based bonuses, which may explain their significance in investment banking. In the third essay, I consider the securitization market. First, I provide an explanation for equilibrium credit ratings inflation that does not require investor irrationality. Second, I argue that moral hazard in securitization results in banks either selling the entirety of securitized products, or none at all. Finally, I consider a number of possible government interventions in the market and conclude that many proposed interventions are either ineffectual or counterproductive. In the fourth essay, we design an improved LIBOR reporting mechanism. This mechanism, which we name the "whistleblower mechanism," uses the revealed preference of other banks to determine the borrowing rate of a given bank. Truthful reporting is the sole equilibrium of the mechanism that we design; the mechanism is budget-balanced. In the fifth essay, we consider the analogy between systemic risk and pollution. We argue that an ex post tax cannot replicate capital regulation because of a 'polluter cannot pay' problem. Secondly, we show an equivalency result between ex ante taxation and capital regulation. We then show that unless the ex ante tax is levied in capital, however, it may perversely increase the amount of debt in the financial system. We argue for further capital regulation.

This dissertation is entitled "Essays in the International Economics of Credit and Banking". It comprises three essays. The first essay develops an empirical model of international credit with moral hazard and the risk of repudiation to examine (i) the determinants of the intertemporal and cross-national variations in credit ceilings and (ii) the channels through which output attracts foreign credit. It reports that productivity is the most important variable in attracting credit, followed by education, and then physical capital. Furthermore, international trade, country financial risk ratings, and geography explain more than 60% of the cross-national variations in credit ceiling. Therefore, international relations and investment in education and productivity-enhancing institutions are crucial in attracting foreign credit.<br>The second essay develops open-economy variants of the old Friedman-Schwartz and the new Lucas-Sargent-Wallace monetarist models to investigate the puzzle of monetary neutrality. The essay further introduces financial aggregation theories into the models. It studies the theoretical and business-cycle relationships between real output and financial aggregates, interest rates, exchange rate, and prices using Canadian quarterly data for the period 1959: 1 to 2002: 1. It reports that the open-economy variants of the monetarist models with aggregation-theoretic financial aggregates perform the best in producing significant sign patterns that are predicted by theory. Furthermore, Monte Carlo experiments show that large percentage of real output variance is explained by shocks to aggregation-theoretic financial aggregates relative to other variables. Thus, there is no difference between the effects of anticipated and unanticipated monetary shocks.<br>The third essay examines the appropriate formulation of the monetary aggregate for the Nigerian economy for the period 1970:1-2000:4 for the determination of real output. This examination covers simple sum, variable elasticity of substitution (ves), and divisia (dv) aggregation over currency, demand deposits, and savings deposits. The user cost of liquid assets is employed in the construction of both the dv and the yes aggregates. Using maximum likelihood estimation technique, the essay reports that, for the Nigerian economy, currency does as well as or better than any narrow- or broad-money measure in explaining industrial production. Further, the simple sum m1 and m2 outperformed both the yes and dv aggregates. Therefore, monetary policy in Nigeria should focus on the supply of currency and/or of narrow money, rather than on broad money or the divisia aggregates.

The objective of this dissertation is to shed light on the decision-making behavior of banks under liquidity and credit risks as well as the impact of market structure (competition and mergers) on such behavior. The analysis of this dissertation differs from the previous studies in that we explicitly analyze the effects of liquidity and credit risks on banks' decisions and profits. The analysis of this dissertation can be separated into two main parts. The first part focuses on the effect of liquidity risk on banks' decisions and profits (Chapters 2 and 3 ) while the second part concentrates on the effects of credit risk and bank regulations (Chapter 4 ).The main objective of Chapter 2 is to investigate how the uncertainty in terms of early withdrawals from depositors (which creates liquidity shortage) affects banks' behavior. We examine a model of horizontal mergers within the banking industry based on an inventory-theoretic approach. In our model, banks compete by offering differentiated loan products and face uncertainty in terms of liquidity shortage. Their goal is to optimally allocate the amount of deposits collected into loans and reserves so as to maximize their expected profits. We analyze how the equilibrium loan rate and reserve holdings of each bank are affected by the risk of early deposit withdrawals. An interesting result is obtained when the liquidity risk is relatively large: the equilibrium reserve holdings can then actually decrease in the risk of early withdrawals. A merger increases the loan rate charged to the customers and profits of all banks. The risk of early withdrawals is also a key factor in determining the profitability of mergers. Lastly, mergers, in general, decrease total reserves, thereby potentially increasing liquidity shortages in the banking system.In Chapter 3 , the analysis still focuses on the impact of liquidity risk. However, the aim of this chapter is to examine the stability of bank mergers by using the definition of stable cartel proposed by d'Aspremont et al. (1983). We find that as long as the number of banks in the market is more than three, a no-merger scenario is never externally stable. Also, we consider the stability of the grand merger where all the banks merge. The result shows that the less differentiated the loans are, the more likely it is that the grand merger is stable. For the impact of the risk of early withdrawals, we show that a high degree of liquidity risk might weaken the stability of a grand merger, i.e., a merger of all banks in the industry, irrespective of the degree of loan differentiation.In Chapter 4, we examine the effects of market structure and bank regulations (capital adequacy requirements and deposit insurance premium schemes) on bank decisions in presence of risk of loan repayment (credit risk). Then, we analyze how mergers affect the equilibrium decisions and profits of banks. It is shown that when a risk-based insurance premium is used, the equilibrium loan rates and probability of bank failures increase but profits decrease in the risk of loan repayment. On the other hand, when flat rate insurance premium is used, banks have incentives to take more risk because their profits increase in the credit risk. Moreover, a higher capital adequacy ratio decreases the probability of bankruptcy due to credit risk. Regarding the effects of merger, our analysis shows that mergers are not necessarily beneficial for merged banks. Indeed, it might result in lower profits and higher risk of bank failures for merged banks compared to their pre-merger scenario. On the other hand, non-merged banks benefit from a merger by earning higher profits and lower risk of bank failures compared to the pre-merger scenario.<br>L'objectif de cette thèse est d'analyser le comportement des banques assujetties aux risques de manque de liquidités et de crédit lors d'une prise de décision, et de déterminer l'impact de la structure du marché (compétition et fusions) sur ce comportement. L'approche de cette thèse se distingue de celles d'autres études en ce que nous analysons de façon explicite les effets de liquidités et les risque qu'ils comportent pour les décisions et les profits des banques. Cette thèse se divise en deux parties. La première se concentre sur les effets de risques de liquidités sur les décisions et les profits des banques (voir Chapitres 2 et 3), tandis que la deuxième se concentre sur les effets du risque de crédit et de la réglementation des banques.L'objectif principal du Chapitre 2 est de montrer jusqu'à quel point l'incertitude concernant des retraits précipités par les déposants peut influencer le comportement des banques. Nous examinons un modèle composé de fusions horizontales dans le contexte du secteur bancaire basé sur la théorie des inventaires. Les banques se font concurrence en offrant des prix différenciés et font face à un risque de manque de liquidités. Leur but est d'allouer de façon optimale leurs dépôts entre prêts et réserves afin de maximiser leurs profits anticipés. Nous étudions comment le taux d'intérêt des prêts octroyés et les réserves de chaque banque à l'équilibre sont influencés par le risque de retraits de dépôts précipités. On obtient un résultat intéressant lorsque le risque de liquidité est relativement élevé: les réserves peuvent diminuer lorsque le risque de retraits précipités augmente. Lors d'une fusion, le taux d'intérêt payé par les clients et les profits générés par chaque banque augmentent. Le risque de retraits précipités est aussi un facteur clé qui détermine la profitabilité des fusions. Finalement, les fusions ont tendance à diminuer les réserves totales, ce qui pourrait augmenter les manques de liquidités dans le système bancaire.L'analyse dans le chapitre 3 se concentre sur l'impact du risque de liquidité. L'objectif de ce chapitre est d'investiguer la stabilité des fusions bancaires au biais de la définition d'un cartel stable tel que défini par d'Aspremont et al. (1983). Nos résultats montrent qu'à condition d'avoir plus de trois banques, un scénario sans fusion n'est jamais stable car la fusion entre deux banques est toujours profitable. De plus, nous prenons en considération la stabilité d'une grande fusion où chaque banque participe à la fusion. Nos résultats indiquent que moins les prêts sont différenciés, plus il est probable que la grande fusion soit stable. Nous montrons qu'un degré élevé de risque de liquidité diminue la stabilité d'une grande fusion c'est-à-dire une fusion entre toutes les banques.Dans le quatrième chapitre, nous étudions les effets de la structure du marché et des règlementations des banques sur les décisions prises par les banques en présence du risque de crédit. Nous démontrons que lorsqu'une prime d'assurance basée sur le risque est utilisée, les taux d'intérêt à l'équilibre et les probabilités de faillites bancaires augmentent mais que les profits diminuent avec le risque de crédit. Par contre, lorsqu'il y a une prime d'assurance à taux fixe, cela incite les banques à prendre plus de risques étant donné que leurs profits augmentent avec le risque de crédit. Cependant, un ratio d'adéquation de fonds propres plus élevé diminue la probabilité de faillite. Concernant les effets de fusions, notre analyse démontre que celles-ci ne sont pas nécessairement avantageuses pour les banques déjà fusionnées. En effet, elles peuvent engendrer une baisse de profits et accroître le risque de faillite bancaire pour les banques fusionnées comparativement au scénario pré-fusion. D'autre part, les banques non fusionnées bénéficient d'une fusion en voyant leurs profits augmenter et courent un risque de faillite moins élevé en comparaison avec le scénario pré-fusion.

<p> This research focused on hawala regulations in multiple jurisdictions, strategies of international bodies to mitigate illicit transfers, and implementation of a standardized approach to monitor money remittances. Transfer mechanisms used to remit funds internationally appeal to individuals, organized crime groups, terrorist financiers, and money launderers. Literature reviewed consisted of government studies, financial body reports, media articles, and peer-reviewed journals. Evaluation of different methodologies and the Financial Action Task Force&rsquo;s supervisory controls was completed. It was determined that economic pressure may impact financial networks and encourage compliance if regional government bodies have the necessary authority to enforce regulations. Research revealed recommendations for education programs to aid jurisdictions in setting up financial intelligence units, developing statutes tailored to their economies, and enforcement of supervisory controls. This report further suggested accountability amongst jurisdictions to reduce the ability of criminals and terrorist financiers to move their financial activities to areas with lax enforcement and corrupt governments that do not enforce regulatory recommendations. It also encouraged tracking financial activity and implementing licensing requirements to mitigate de-risking of high-risk customers with the provision of education to customers and third-parties through formal financial institutions. Reduction of unlicensed money remittances and mitigation of illicit funding benefiting organized crime and terrorism is the ultimate goal.</p>

This thesis analyzes, in an emerging market context, the effects of financial frictions and bank prudential regulation on the business cycle. It also proposes a prudential rule that smoothes the external finance premium, and at the same time, improves the effectiveness of the monetary policy. I hypothesize that the macroeconomic effects of bank capital requirements are procyclical and lead to the amplification of monetary shocks, therefore reducing their effectiveness for fighting inflation. These effects increase the financial system vulnerability in recessions, and could be stronger in emerging markets under dollarization or credit market imperfection. By using a Dynamic Stochastic General Equilibrium Model (DSGE), with banks and prudential regulation, I show that there is a need to implement a prudential rule with countercyclical effects, which should complement the monetary rule, and allow for the smoothing of the effects of monetary shocks in the business cycle. This rule supports the Basel Committee for Banking Supervision's efforts to strengthen the capital accord after the subprime financial crisis, which is already under revision by regulators all over the world. The estimated results also show the existence of financial frictions and rigidities that do not allow for a complete pass-through of the monetary policy to interest rate. As well, prudential capital requirements have an amplifier effect in the business cycle, even deeper under the Basel II accord. As the current prudential regulation could increase banking system vulnerability in a recession, a countercyclical capital requirement could help to reduce these effects and to keep the strength and solvency of the financial system.<br>Ce document analyse, dans le contexte d'une économie émergente, les effets des rigidités financières et réglementations prudentiels de capital bancaire sur les fluctuations économiques. En plus, il propose une règle prudentielle qui permettra assouplir ces effets dans le coût du financement externe des sociétés et en même temps qu'améliorera le déménagement de la politique monétaire. Il est aussi proposé l'hypothèse que les effets macroéconomiques des réglementations bancaires ont tendance à être pro cycliques et à amplifier les shocks monétaires tout en affectant le mécanisme de transmission et l'effectivité de la politique monétaire dans le but de contrôler l'inflation. Ces effets, tendent à incrémenter la vulnérabilité du système financier pendant les récessions et deviennent plus grandes à l'économie émergente, avec la dollarisation ou la concurrence imparfaite dans le marché des crédits. A travers de l'usage des Modèles Dynamiques d'Equilibre Général (DSGE) avec des banques et régulation prudentielle, c'est établi la nécessité de l'existence conjointe d'une règle monétaire, d'une règle prudentielle de capital bancaire qu'agisse de manière contra cyclique, permettra assouplir les effets des shocks dans les cycles économiques. Cette règle fondement aux politiques qui propose le Comité de Basel pour la Surveillance Bancaire a partie des modifications à l'accord de capital qui sont en train d'être discutés au niveau international après la crise financière sub-prime. Les résultats des simulations numériques montrent que l'existence des frictions financières et rigidités donnent lieu non pas seulement à un déménagement incomplet de la politique monétaire dans les taux d'intérêt, mais aussi un effet amplificateur de la réglementation prudentielle bancaire Basel II. En même, il se trouve que la politique prudentielle actuelle a une tendance à augmenter la vulnérabilité du system financier pendant la phase de récession, raison pour laquelle une politique de capital bancaire contra cyclique tende à assouplir ces effets et à contribuer à la stabilité et solvabilité des systèmes financiers.