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Essays in Financial Intermediation

Gao, D. (2023). Essays in Financial Intermediation. (Unpublished Doctoral thesis, City, University of London)


This thesis investigates key challenges facing financial intermediaries, particularly banks, in achieving optimal allocation of resources. In the first chapter, Angela Gallo, Vasso Ioannidou, and I examine the empirical boundaries of bank-issued wealth management products (WMPs) serving as safe assets. We show that the recent popularity of such products in China aims to satisfy the excess demand for safe assets among Chinese retail investors. Exploiting granular information at the contract level, we find that retail investors, who have limited access to international capital markets, are willing to pay a substantial safety premium on short-maturity WMPs issued on banks’ balance sheets. Institutional investors, who instead have easier access to international capital markets, do not take a safety premium. Further analysis of issuer characteristics reveals that the perceived safety of WMPs by retail investors draws on implicit government guarantees.

In the second chapter, I focus on the paramount environmental issues in the context of financial intermediation. I investigate whether and how firm-level environmental risks are reflected in banks’ credit policies, in the absence of intense regulatory scrutiny. Following an adverse environmental incident, banks begin to take into account weak environmental performance as a fundamental risk to firms by requiring higher loan interest rates and more restrictive covenants on firms with environmental concerns. However, this shift in lending practices is driven by banks with green expertise, namely, an information advantage accumulated through prior relationships with environmentally friendly firms. Other banks that do not possess such green expertise tend to issue loans with shorter maturities and more collateral to mitigate environmental risks. I further illustrate that banks’ green awareness gets transmitted to the real economy, leading to improvements in firm-level emission reduction and green innovation.

Despite recent eorts to address environmental risks, financial resources channelled by the private sector fall far short of the level required to support the transition to a sustainable economy. In the third chapter, Torsten Ehlers, Frank Packer, and I suggest that taxonomies can be an eective and ecient policy tool in scaling up sustainable finance and supporting high-level goals such as the Paris Accord and the UN Sustainable Development Goals. We develop a framework to classify and compare existing taxonomies. Several weaknesses emerge from the comparison, including the lack of usage of relevant and measurable sustainability performance indicators, a lack of granularity, and a lack of verification of achieved sustainability benefits. On this basis, we propose key principles for the design of eective taxonomies and develop a simple framework for transition taxonomies. The key policy messages of the analysis are (i) Endeavour to ensure that taxonomies correspond to specific sustainability objectives; (ii) Encourage the development of transition taxonomies and focus alignment with the objectives of the Paris Agreement; (iii) Monitor and supervise the evolution of certification and verification processes; and (iv) Shift to mandatory impact reporting for green bonds.

Publication Type: Thesis (Doctoral)
Subjects: H Social Sciences > HG Finance
J Political Science > JQ Political institutions Asia
Departments: Bayes Business School > Bayes Business School Doctoral Theses
Bayes Business School > Finance
Doctoral Theses
[thumbnail of Gao Thesis 2023 PDF-A.pdf] Text - Draft Version
This document is not freely accessible until 31 August 2026 due to copyright restrictions.


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