Essays on banking
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Date
07/07/2018Item status
Restricted AccessEmbargo end date
07/07/2019Author
Lim, Ivan Wen Yan
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Abstract
This thesis consists of three essays on banking in the U.S. The first two chapters
study how supervisors and regulators influence bank behavior. The third chapter
explores how bank CEOs allocate credit.
The first chapter uses a quasi-natural experiment, the closure of regulatory
offices, to identify the effects of supervision on bank behavior. Under the decentralized
structure of U.S. bank supervision, banks in the same geographic area may be
supervised by different regulatory offices. The chapter shows that, following the
closure of a regulatory office, banks previously supervised by that office increase their
solvency risk and lending compared with banks in the same counties that are
supervised by a different regulatory office. Further, these banks exhibit lower risk-adjusted
returns, lower asset quality, and opportunistic provisioning behavior for loan
losses. Information asymmetry between banks and supervisors partly explains the
results.
The second chapter documents that nearly 30% of U.S. banks employ at least
one board member who currently or previously served on a regulator’s advisory
council or on the board of a regulator as a form of public service. The chapter shows
that connections to regulators undermine regulatory discipline by decreasing the
sensitivity of bank risk to capital. Connected banks are able to extract larger public
subsidies than non-connected banks by shifting risk to the financial safety-net,
resulting in wealth transfers from taxpayers to shareholders of risk-shifting connected
banks. One potential reason for these effects is that connected banks receive
preferential treatment in supervision from regulators.
The third chapter uses the birthplace of U.S. bank CEOs to investigate the
effect of hometown favoritism on bank business policies. Exploiting within-bank
variation in distances to a CEO’s hometown, the chapter shows that banks make more
mortgage and small business lending as well as branch expansions in counties that are
proximate to the hometown of the CEO. This is due to the CEO’s altruistic attachment
to her hometown; the effects are stronger during economic downturns, among altruistic
CEOs, in poorer counties and marginal mortgage applicants. Further, hometown
favoritism does not lead to worst bank performance. However, it is associated with
positive economic outcomes in counties exposed to greater favoritism.