Search Results
Working Paper
Bank Capital and Deposit Insurance
This paper examines the relationship between bank capital and reliance on insured deposit funding. Contrary to the conventional moral-hazard view underlying risk-based capital regulation, U.S. bank data reveal a robust negative association between capital and the share of insured deposits. We develop a delegated-monitoring model in which banks choose between insured and uninsured deposit financing. Although monitoring increases with capital under both funding regimes, its sensitivity to capital is greater when deposits are uninsured, strengthening the relative attractiveness of uninsured ...
Working Paper
Financing Modes and Lender Monitoring
Shadow banks are widely believed to be a creation of financial regulation and regulatory arbitrage. We show that bank and nonbank modes of financing can emerge endogenously in a simple borrower-lender framework absent regulatory arbitrage or policy interventions. The coexistence of banks and shadow banks in the absence of regulatory intervention speaks to the importance of shadow banks as alternative modes of financial intermediation. We explore the scope of regulation in determining the size and location of shadow banking, as opposed to how regulation can be designed to curtail shadow bank ...
Working Paper
Market Integration and Bank Risk-Taking
Using a workhorse model of bank competition and risk-taking, we show that increased competition from market integration affects bank risk-taking in ways beyond a simple increase in the number of competitor banks. Research has shown that increased competition in the form of an increase in the number of competitor banks can reduce risk-taking—the bank-competitor effect. Market integration not only increases the number of banks, but also the number of potential customers (depositors and borrowers) available to each bank. Increases in the potential customer base induces banks to behave more ...
Working Paper
Bank Competition and Risk-Taking under Market Integration
Linkages between bank competition and risk-taking are analyzed in a model where market integration is the principal driver of increased competition. Risk implications of across-market competition un-der banking market integration are significantly different from that of within-market competition. While both modes of competition increase the number of competitor banks, across-market competition yields a bank-customer effect that can potentially reverse any relation that prevails be- tween within-market competition and risk-taking. This result suggests that the lack of consensus in the bank ...
Working Paper
Does Risk-Taking Increase or Decrease with Higher Interest Rates?
We present a framework that accounts for how interest rates affect risk-taking by borrowers indirectly, by changing the borrower’s demand for credit (investment size). We find that this borrowing demand effect runs counter to the direct borrowing rate effect, and risk-taking can increase or decrease with higher rates depending on the relative strength of these effects. We show that the borrowing rate effect dominates when the borrower’s share of project returns is increasing in investment, so risk-taking increases with interest rates. However, the borrowing demand effect dominates when ...