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Three essays on micro- and macroprudential regulation and the effects on bank conduct and the real economy

Danisewicz, Piotr (2014) Three essays on micro- and macroprudential regulation and the effects on bank conduct and the real economy. PhD thesis, Prifysgol Bangor University.

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Abstract

This thesis examines the effects of micro- and macroprudential regulations on banks conduct and the real economy. We begin with an analysis of regulatory enforcement actions’ effect on regional economic growth in the U.S. Next, we evaluate changes in bank conduct resulting from the implementation of state depositor preference law. Finally, we focus on macroprudential regulation and their effect on multinational banks’ cross-border lending. Throughout this thesis we employ quasi-experimental estimation techniques to establish our results. In the first chapter, we account for the non-random assignment of regulatory enforcement actions by employing instrumental variables regressions that exploit exogenous changes in the intensity of regulatory monitoring. We show that sanctioning banks with Formal agreements, Prompt corrective actions or Cease and desist orders leads to economically significant yet only temporary reductions in personal income growth, the number of establishments, while simultaneously increasing the unemployment rate. We document that these real effects are driven by contraction in bank lending and liquidity creation which also follow the issue of severe enforcement actions. Using difference-in-difference estimations that exploit plausibly exogenous variation in the implementation of state depositor preference law in the U.S., we show that changing claims’ priority structure on failed banks’ assets triggers important changes in banks conduct. We document that conferring priority to bank deposits at the cost of non-deposits intensifies bank monitoring by general creditors. This result is reflected in higher costs of banks’ non-deposit funding. We are also able to demonstrate that banks respond to more intensive monitoring by adjusting conduct. Financial institutions subject to the new claims priority structure reduce their risk taking and improve their profitability. Finally, we document that foreign banks’ organizational structure plays an important role in cross-border transmission of macroprudential regulation. We document that lending provided by foreign banks branches in the UK is more sensitive (relative to subsidiaries) to tightening of capital requirements in the home markets of their parent banks. Difference-in-difference estimates reveal that on average foreign banks 2 operating under the branch structure reduce their lending to other financial institutions in the UK by 6% more compared to subsidiaries. We find no heterogeneity in banks’ response to lending standards and reserve requirements. This thesis presents two key policy implications. First, our results show that the introduction of the depositor preference laws should have beneficial effects on the banking industry. In case of enforcement actions and macroprudential regulation effects policy implications are not as clear cut as for depositor preference. While, we find adverse effects stemming from the use of enforcement actions and higher sensitivity of branch lending to macroprudential regulation these effects are short-lived and therefore may not necessarily offset the benefits resulting from exercising these regulation.

Item Type: Thesis (PhD)
Additional Information: No permission for electronic availability
Subjects: Degree Thesis
Departments: College of Business, Law, Education and Social Sciences > Bangor Business School
Degree Thesis
Date Deposited: 14 Aug 2015 10:13
Last Modified: 31 May 2016 14:14
URI: http://e.bangor.ac.uk/id/eprint/5217
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