Essays on the Impact of Competition on Financial Intermediaries PDF Download

Author: Pragyan Deb
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Languages : en
Pages :

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The aim of my thesis is to investigate the effect of competition on financial intermediaries in light of the conflicts of interest and perverse incentive structures that exist in the financial system. The first chapter of my thesis, Credit Rating and Competition investigates the conflict of interest arising from the issuer pay compensation model of the credit rating industry using a theoretical model of competitive interaction. Rating agencies balance the benefits of maintaining reputation (to increase profits in the future) and inflating ratings today (to increase current profits). Our results suggest that, unless new entrants have a higher reputation vis-a-vis incumbents, rating agencies are more likely to inflate ratings under competition relative to monopoly, resulting in lower expected welfare. The second chapter, Market Frictions, Interbank Linkages and Excessive Interconnections, studies banks' decision to form financial interconnections. I develop a model of financial contagion that explicitly takes into account the possibility of crisis. This allows me to model the network formation decision as optimising behaviour of competitive banks. I show that regulatory intervention in the form of deposit insurance and more implicit too big to fail type perceptions of government guarantees creates a wedge between social and private optimality. In the presence of these implicit and explicit guarantees, competitive banks find it optimal to form socially suboptimal interconnections in equilibrium. The final chapter, Competition, Premature Trading and Excess Volatility, attempts to explain the empirically observed excess asset price volatility as a consequence of competitive interaction between market participants. Our model shows that in the presence of competitive pressures, market participants find it optimal to act prematurely on unverified, noisy information. This premature reaction leads to lower total profits, excess market volatility and spike in volatility at the closing time of the market.

Author: David Abell
Publisher:
ISBN:
Category :
Languages : en
Pages : 173

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This dissertation continues the tradition of identifying the effects of economic shocks to financial intermediaries. Its main contribution is to estimate the size of credit market disruptions in the form of government intervention, asset market crises, and competitive pressures, while using methods that are more novel and appropriate than those of previous work. Chapter 1 examines the effect of the elimination of U.S. banking regulations, which are intended to expand the access of financial services within states and across state-lines, on entrepreneurship activity. It finds that there was increase in small business formation following the deregulation of interstate banking, but not intrastate banking. Results indicate allowing banks to lend and take deposits across state lines increases small business formation by up to 8%. There is a delayed impact following the passage of legislation indicating credit markets require time to adjust to the new regulatory environment. Heterogeneous effects exist across firm sizes in terms of economic impact magnitude and timing. The main contribution of the chapter is that examines the impact on entrepreneurship in separate periods after the initial passing and on subsets of small businesses. Whereas Chapter 1 estimates the effect of a foreseen event, Chapter 2 focuses on the impact of unexpected housing crisis on financial intermediaries loan servicing decisions. As the housing market worsened mortgage lenders could not rely solely on foreclosure processes to reduce losses on homes in default, rather many found the need to engage in modifying loan terms to allow borrowers to continue making mortgage payments. Modifications that increased the affordability of monthly payments were effective at halving the cumulative 36-month redefault rate for mortgages between 2008 and 2011. Findings indicate the improving economy and mortgage risk characteristics are not enough to explain the reduction in redefault. Instead, results find evidence of "learning -by-doing" i.e., servicers become better at targeting borrowers for modification and providing the appropriate payment relief over time. Voluntary government modification programs serve as guidelines for servicers to design and invest in their own modification processes. The impact of this learning by doing is evident before and after controlling for macroeconomic conditions, borrower characteristics, and loan terms. Previous studies do not effectively isolate the improvement in post-modification with an econometric model using a control group similar to this one. Furthermore, other studies consider only particular servicer subsets of mortgage modifications, such as private securitized, whereas the sample here considers all servicer types and payment reducing modifications. Ultimately, the results indicate mortgage modifications were an effective non-foreclosure alternative to keep homeowners in their homes and monthly payments flowing to mortgage servicers. Chapter 3 examines the impact of changes in bank competition on bank capital in the United States. Allen et al. (2011) proposes excessive capital holdings, i.e., capital holdings above regulatory requirements, are attributable to market discipline arising from banks' asset side. Theory predicts competition incentivizes banks to hold higher levels of capital because this indicates a commitment to monitoring to encourage bank stability. I examine heterogeneous impacts of competition on capital over the business cycle and across bank size. Economic downturns usually bring significant changes to bank concentration, which can cause a different impact than during economic booms. Smaller banks can feel different competitive pressures than larger banks due to a focus on local lending activities. I have two main results. More intense competition is associated with higher bank capital ratios at all times (before, during, and after the financial crisis) for small, medium, and large banks. All banks see a larger impact during the crisis period compared to the pre- and post-crisis periods. The findings of this paper can have significant policy implications for the application of anti-trust regulation, since capital ratios are commonly used to restrain individual and systemic bank risk.

Author: Marc S. Schaffer
Publisher:
ISBN:
Category :
Languages : en
Pages : 130

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In the wake of our country's greatest financial crisis since the Great Depression, the need to better understand the risks and behaviors associated with financial intermediaries has become apparent. In particular, the literature distinguishes between traditional or depository based financial intermediaries and their market based or non depository counterparts. This dissertation focuses on understanding the behavioral differences across these two groups by examining their equity based risk differences, their stock market delisting differences, and lastly how these firms react to economic policy uncertainty. The first essay uses an equity based approach to quantify the average firm level risk that is associated with these intermediary groups. While these intermediaries, at times, demonstrate similar risk behaviors, the market based financial intermediaries display a distinct ten year period of greater risk beginning in 1994. Since the 1980s there has been a trend of increasing financial market instability that is commonly attributed to increasing competition, securitization, and deregulation. Using a historical decomposition approach, I analyze which of these factors best explains the changing relative risk behaviors across the traditional and market based intermediaries. The most important factor in driving these behaviors was deregulation, with competition also having a significant impact. The second essay examines the stock market survival behavior of each of these respective groups and the role that risk plays in explaining delisting due to firm failure, as well as merger and acquisition activity. Using survival analysis, the delisting behavior of these intermediaries is examined where the market based firms are more likely to delist relative to the traditional firms due to both firm failure and M and A activity. Additionally, idiosyncratic risk is found to have a statistically significant impact in driving these behaviors. The last essay focuses on how each of these intermediary groups alters their balance sheet in the face of economic uncertainty. Specifically, I examine how the debt financing behavior of these firms reacts to an economic policy uncertainty shock using a macroeconomic approach. The key results, from the impulse response and variance decomposition analysis, indicate that market based financial intermediaries tend to have faster responses to policy uncertainty relative to traditional intermediaries, however the small traditional financial intermediaries have the largest response.

Author: Robert Samuel Marquez
Publisher:
ISBN:
Category :
Languages : en
Pages : 120

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Author: Lantian Liang
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Category : Chief executive officers
Languages : en
Pages :

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This dissertation consists of two essays that study the issues related to financial intermediaries. In the first essay, I examine the effects of institutional common ownership on the use of peer benchmarking for CEO pay. By compensating managers based on their co-owned peers' performance as well as their own performance, blockholders can incentivize managers to avoid head-to-head competition with their co-owned peers while maximizing group performance. I find that CEOs' total compensation is positively sensitive to the stock performance of industry peers that share common blockholders. Furthermore, I document that firms sharing common blockholders tend to have more differentiated products, greater joint market share, and greater geographical overlap in business operations. In the second essay, my coauthors and I examine the impact of the disclosure regulation under Regulation AB, which is the disclosure rule that requires all material risk factors applicable to the transaction or to the nature of the security to be disclosed. Specifically, we look at the responses of financial intermediaries to the regulatory changes on disclosure in the asset-back securities market. We find an immediate jump in the percentage of deals with origination stakes just below the disclosure threshold following the implementation of Regulation AB. We also provide evidence that MBS underwriters deliberately keep lower quality loans below the disclosure threshold in order to evade disclosure.

Author: Ranajoy Ray Chaudhuri
Publisher:
ISBN:
Category :
Languages : en
Pages : 117

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Abstract: My dissertation explores the impact of financial development, as well as regulatory changes in the financial sector, on economic growth. Recent literature on growth has often focused on the importance of financial intermediation and institutional quality. Advocates of financial development say that the development of the banking sector and stock markets increase the financing available to firms, raising productivity. The "institutions hypothesis" proponents suggest that institutions jointly determine the growth rate and the policy choice, while policies themselves bear no causal connection to growth. Such hypothesis is difficult to test empirically because the change in institutional quality is, with a few historic exceptions, very slow. For the most part, therefore, a country's economic performance can end up being attributed to a random cause. Using a cross-country data set and numerous financial indicators, institutional quality variables and growth measures, I find that this is not true of financial development. Financial variables have a significant effect on growth that is distinct from that of institutions like private property and rule of law. I also consider this issue in the context of the fifty U.S. states. States differ with respect to financial indicators like the number of banks, assets, equity, loans and deposits. They also vary in terms of their regulatory environments. States like Delaware, Texas and Nevada have very high scores for economic freedom; Mississippi, New Mexico and West Virginia have very low ones. The results again underscore the importance of financial deepening in order to achieve economic growth. Taking up from this point, the final essay studies the impact of U.S. banking deregulation on growth. Many states relaxed restrictions on intra-state bank branching beginning in the early 1960s, both by allowing bank holding companies to convert subsidiaries into branches and by permitting statewide de novo branching. This increased competition in the banking sector forced banks to become more efficient. The existing literature suggests that one of the channels through which this worked was bank lending. Different industries have varying degrees of dependence on external financing, and industries that have greater dependence should grow faster in the post-deregulation period. Using a panel data set, I find this not to be the case for the U.S.; industries that borrow less from banks actually grew at a faster rate after deregulation. This could reflect commercial banks losing market share to other sources of external financing, the general decline in the U.S. manufacturing sector and the terms of trade moving in favor of agriculture. I also consider the effect of deregulation on various banking indicators and find the strongest impact to be on the number of commercial banks operating in the state. Contrary to existing research, these regulatory changes slowed down growth in the number of bank branches and offices, as well as other measures of bank performance like assets, equity, loans and deposits. This suggests that the gains from deregulation are short-lived, and also indicate unprofitable smaller banks shuttering their operations and the emergence of credit unions and other alternatives to commercial banks.

Author: C.J.M Kool
Publisher: Springer Science & Business Media
ISBN: 1461312639
Category : Business & Economics
Languages : en
Pages : 252

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Essays on Money, Banking and Regulation honors the interests and achievements of the Dutch economist Conrad Oort. The book is divided into four parts. Part 1 - Fiscal and monetary policy - reviews a variety of topics ranging from the measurement of money to the control and management of government expenditures. Part 2 - International institutions and international economic policy - looks at the international dimension of monetary and fiscal policy, with extensive discussion of the International Monetary Fund and the European Monetary Union. Part 3 - The future of international banking and the financial sector in the Netherlands - is an insider's view of the strategic choices facing financial institutions in the near future. Finally, Part 4 - Taxation and reforms in the Dutch tax system - is closest to Oort's research and practice since he has become known as an architect of the 1990 Dutch tax reform; this part is dedicated in particular to the tax reforms suggested by Oort.

Author: Yiming Ma
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Languages : en
Pages :

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This dissertation sheds light on how the interaction between banks affects the functioning of the financial intermediary by applying tools and concepts from industrial organization to financial intermediation. The first chapter studies systemic risk in the interbank market. We first establish that in the German interbank lending market, a few large banks intermediate funding flows between many smaller periphery banks. Shocks to these intermediary banks in the financial crisis spill over to the activities of the periphery banks. We then develop a network formation model in which banks trade off the costs and benefits of link formation to explain these patterns. The model is structurally estimated using banks' preferences as revealed by the observed network structure in the pre-crisis period. It explains why the interbank intermediation arrangement arises, estimates the frictions underlying the arrangement, and quantifies how shocks are transmitted across the network. Model estimates based on pre-crisis data successfully predict changes in network-links and in lending arising from the crisis-shocks to the intermediary banks. The model is used to quantify the systemic risk of a single intermediary and the impact of ECB funding in reducing this risk. The second chapter demonstrates the impact of Treasury supply on commercial banks' funding. We show that banks widen their deposit spread as Treasury supply increases, leading to a net deposit outflow. At the same time, wholesale funding ratios increase. Both effects are heterogeneous - banks in more competitive markets experience larger outflows and more pronounced jumps in wholesale funding. Results remain robust after controlling for investment opportunities and Fed funds rate changes. The empirical findings are rationalized with a search model, in which banks' market power stems from the presence of inattentive depositors. Consistent with \citet{drechsler2016deposits}, the model predicts the opposite effect for Fed fund rate hikes, i.e., a more substantial response in less competitive markets. We shed light on the interaction between monetary and fiscal policy by examining the effects of the recent Reverse Repurchase Facility.

Author: Javed Ahmed
Publisher:
ISBN:
Category :
Languages : en
Pages : 178

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In this dissertation, I analyze behavior of two types of financial intermediaries that play critical roles in capital allocation: ratings agencies and merger advisors. Each type of intermediary survives due to (assumed) informational advantages relative to firms and investors. In the following chapters, I analyze how differences in information between market participants and intermediaries lead to signaling behavior related to privately-observed quality. My results explain some seemingly-anomalous aspects of financial markets, and provide a framework for assessing the impact intermediaries can have on efficient capital allocation. In the first chapter, I examine whether rating agencies strategically manipulate the informativeness of bond ratings in response to competition from private lenders. I model a monopolistic rating agency that caters to a low-quality marginal customer with uninformative ratings. High-quality customers prefer informative ratings but are captive customers of the rating agency in the absence of competition from private lenders. With competition from private lenders, the rating agency uses informative ratings to keep high-quality customers in public markets. The model also suggests that the ratings sector dampens the impact of capital supply shocks, and offers a strategic pricing rationale for the controversial practice of issuing unsolicited credit ratings. In the second chapter, I test predictions of the model using a measure of informativeness based on the impact of unexpected ratings on a debt issuer's borrowing cost. I analyze two events that increased the relative supply of private vs.\ public lending: the temporary shutdown of the high-yield market in 1989 and legislation in 1994 that reduced barriers to interstate bank lending. After each event, I find that the informativeness of ratings increased for issuers whose relative supply of private vs.\ public capital increased most. In the third chapter, I analyze how acquiring firms select and pay advisors. I present a model in which an advisor with privately known quality screens targets (due diligence) and improves negotiation outcomes (bidding). When a transaction involves only bidding, advisors pool by offering fees contingent on a completed transaction. By contrast, a transaction involving due diligence can lead to a separating equilibrium and fixed fees. The model predicts that acquirers use advisor market share instead of stock return-based measures to select advisors when synergies are not observable, and that acquirers with better information about advisor quality pay higher fees. I argue that investors in leveraged buyouts are skilled in acquisitions, and find that they pay higher fees for both mergers and tender offers, controlling for assignment and deal characteristics. They are also less likely to include contingent fees than other acquirers. Results suggest skilled investors use private information about advisor ability to hire advisors, and do so primarily to screen targets rather than to improve negotiation outcomes.

Author: Herbert Giersch
Publisher: Springer Science & Business Media
ISBN: 3642772676
Category : Business & Economics
Languages : en
Pages : 303

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On June 1, 1990, Egon Sohmen would have reached the age of 60 had he not suffered from a fatal illness. It demanded his death at the early age of 46. If he were still with us, he would playa prominent role in the current debate on monetary arrangements and on allocation theory, perhaps in cluding environmental issues and urban economics. His contributions are well remembered by his colleagues and friends, by his former students, and by many in the economics profession on both sides of the Atlantic. In extrapolating his great achievements as a scholar and teacher beyond the time of his death, one is inclined to suppose that Egon Sohmen's name would figure high on many a list of candidates for honors and awards in the field of international economics. For the reconstruction of economics in the German language area Egon Sohmen was invaluable. Born in Linz (Austria), he studied in Vienna at the Business School (Hochschule fUr Welthandel, now Wirtscha!tsuniversitiit), then went to the US as a Fulbright scholar (1953), returned to Europe to take his doctorate in Tiibingen, Germany, (1954) and crossed the Atlantic again to teach at MIT (1955-58) where he obtained a Ph. D. (1958) under Charlie Kindleberger. He might have stayed permanently in the US, con tinuing a career that he started as Assistant Professor at Yale University (1958-61), if the US visa provisions had been applied in a more liberal fashion.