Essays in Financial Economics
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AbstractThis dissertation explores how financial markets are shaped by monetary policy and financial regulation. In the first chapter, I study how banks adjust their balance sheet to the prospect of stricter supervision (co-authored with Camelia Minoiu). We find that banks raise their capital ratios in anticipation of the new regime, but they do so mostly by shedding assets rather than by raising equity. The findings imply that stress tests have a macroprudential dimension that regulators may want to take into account. Chapter two sheds light on the transmission of monetary policy through financial institutions’ propensity to buy risky assets. I evaluate US life insurers’ bond acquisitions during the low interest period after the Great Recession (2009–2015). Life insurers bought corporate bonds with lower credit ratings as interest rates fell. I find no correlation with solvency, which implies that risk-shifting theories cannot account for the observed pattern. Instead, risk-taking is concentrated in public insurers, suggesting that earnings pressure from low interest rates may account for the observed increase in risk-taking. The final chapter develops a theory of Banking Union. In the model, financially-integrated areas benefit from coordinating their bank recapitalization measures and from sharing fiscal capacity. These two elements—joint resolution and joint funding of bailouts—are central elements of the mechanism adopted by the Euro area. However, the theory applies more generally. As the global financial system becomes increasingly connected, cross-border coordination of financial policies becomes more relevant.
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- FAS Theses and Dissertations