Essay On Economic Financial And Banking

Essays on banking, financial markets, and macroeconomics

Zhao Yang, University of Pennsylvania

Abstract

In this dissertation, I study the optimal decisions of financial market participants such as households, banks, and countries in different kinds of financial markets. In the first chapter, I study the optimal contract and portfolio decisions of banks in an opaque banking system in which consumers have limited information about each bank's asset portfolio and its ability to repay debt. I develop a banking model that is able to explain the bank asset portfolio heterogeneity observed in the 2007-2009 financial crisis, in which some banks incurred large losses from risky assets while other banks had abundant liquidity and made profitable purchases and acquisitions. In this banking system, inefficient risk-taking is undetectable by consumers until a bank incurs losses. Upon learning about such losses, consumers run on the affected bank, which becomes bankrupt and begins to liquidate assets. In equilibrium, risk-taking and potential bankruptcies of a small number of banks are generally unavoidable. However, these bankruptcies indirectly prevent more banks from engaging in risk-taking and therefore the banking sector is endogenously divided into risk-taking and healthy banks. In the second chapter, I study the impact of capital requirements on bank risk-taking and the welfare of depositors using the banking model developed in the first chapter. I find that in the existence of financial opacity, there always exists an optimal level of capital requirement. A capital requirement that is too high or too low is not optimal for welfare. In the third chapter, I study the impact of funding from public institutions on consumption smoothing and sovereign debt default using a dynamic macroeconomic model with endogenous default risk. In the model, a country has access to sovereign bond market where interest rate depends on the default risk in the next period. In addition, the country has access to low interest rate funding from a public institution, where fiscal austerity, represented by an involuntary reduction of consumption, is attached to the use of funding. When deciding whether and how much to use public funding, the country weighs the benefit of low-rate funding and the cost of downward consumption distortion. When the model is calibrated to the Argentine economic crisis in the late 1990s, the model can account for the negative correlation of IMF funding and output and match the volatility of IMF funding.^

Subject Area

Economics, General|Economics, Finance|Business Administration, Banking

Recommended Citation

Yang, Zhao, "Essays on banking, financial markets, and macroeconomics" (2013). Dissertations available from ProQuest. AAI3566482.
https://repository.upenn.edu/dissertations/AAI3566482

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Since September 16, 2013

COinS
Abstract

This dissertation presents two lines of research on public finance and banking respectively. The research on public finance explores the source of China’s state capacity, including fiscal capacity and the bureaucracy, and whether such state capacity promotes economic development. The research on banking discusses the discrimination in China’s bank loan markets, and the role of political connections and policy uncertainty in affecting bank risk-taking in the United States. My first chapter is about the state capacity in China. We offer a comprehensive study on the causal effects of state capacity in explaining China's spectacular economic growth, using rich historical variation and various outcomes in economic performance, education, health care, finance, and social unrest. Our estimates indicate that fiscal capacity has significantly positive impacts. However, a large size of bureaucracy plays a much weaker role, and it cannot reduce the incidence of protests, suggesting the existence of overstaffing in the public sector. The second chapter analyzes costly discrimination related to physical attractiveness and gender in bank loan markets using a market structure-based method. The rationale is that a concentrated market provides more space for loan officers to discriminate against a certain group of borrowers. We find that loan officers prefer good-looking people and males in relatively risky commercial/industrial loan markets. On the other hand, females and especially young good-looking females have an advantage in mortgage loan markets. We interpret these different patterns of favoritism as a result of differential risk levels associated with the two types of loans. The third chapter studies how political connections and their interaction with economic policy uncertainty affect banks' risk-taking. Our hypothesis is that policy uncertainty increases the option value of waiting but political connections can reduce such option value. We find when policy uncertainty is low, politically connected banks have a weaker tendency to take on more risk than those without political connections and enjoy the quiet life. However, when policy uncertainty is high, politically connected banks have much larger amounts of loans, but smaller amounts of loss provision than those without political connections.

URI
http://hdl.handle.net/2152/47264

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