City Research Online

Abstract

This thesis includes three essays investigating different aspects of financial intermediation.

Chapter 1 examines the impact of banks’ collective liquidity mismatch policies on the stability of the financial sector. Using a novel identification strategy exploiting the presence of partially overlapping peer groups, I show that the liquidity created by individual banks is driven by the liquidity transformation activity of their peers. These correlated liquidity mismatch decisions are asymmetric and concentrated on the asset-side component of liquidity creation. Importantly, this strategic behavior increases both the default risk of individual institutions and overall systemic risk. From a macroprudential perspective, the results highlight the importance of explicitly regulating systemic liquidity risk.

Chapter 2 analyzes the credit supply and real sector effects of bank bail-ins by exploiting the unexpected failure of a major Portuguese bank and subsequent resolution. Using a matched firm-bank dataset on credit exposures and interest rates, we show that while banks more exposed to the bail-in significantly reduced credit supply at the intensive margin, affected firms compensated the tightening of overall credit with other sources of funding. Nevertheless, SMEs were subject to a binding contraction of funds available through credit lines and reduced investment and employment. These dampening effects are explained by the pre-shock internal liquidity position of smaller firms.

Finally, Chapter 3 examines the impact of a nationwide banking expansion program on access to finance as well as first-time borrowers’ transition from microfinance institutions to the formal banking sector using microdata on the universe of loans to individuals from a developing country. We show that the program increased the likelihood of obtaining credit, particularly in areas with lower financial and economic development. The overall effect is driven by the newly set-up microfinance institutions (U-SACCOs), which grant loans to unbanked individuals and allow them to build credit history. Loan size increases and loan terms improve as the bank-borrower relationship matures, but these effects are weaker for U-SACCOs than for banks. Consistent with this evidence, a significant share of first-time borrowers switch to commercial banks, which cream-skim less risky borrowers from U-SACCOs after the program implementation and grant them cheaper, larger, and longer-term loans. These borrowers are not riskier and only initially receive smaller loans than similar individuals already in the formal banking sector. These results suggest that the microfinance sector, together with a credit reference bureau, plays an essential role in mitigating information frictions in credit markets.

Publication Type:	Thesis (Doctoral)
Subjects:	H Social Sciences > HG Finance
Departments:	Bayes Business School > Finance Doctoral Theses Bayes Business School > Bayes Business School Doctoral Theses

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