Essays on Bank Competition and Regulation

2019-09-04T17:42:12Z (GMT) by Siyu Lu
The systemic importance of banks in the financial system and the economy hasvbeen long recognized by researchers and policymakers. Banks provide essential services
to both depositors and borrowers, facilitating all kinds of economic activities. This dissertation investigates the mechanism of bank competition and discusses its
implications on bank customers, systemic stability of the banking system, and related policies. In the first chapter, I study the role played by bidders' information quality in
determining the allocative efficiency in auctions for failed banks. Taking advantage of the bidding data on failed-bank auctions during the most recent financial crisis, I
structurally estimate a first price auction model featuring conditionally independent private information to infer bidders' valuation distribution and noise distribution. Through counter-factual simulations, I find a marginal reduction in bidders' noise leads to a significant improvement in allocative efficiency, much larger than the improvement in auction revenue. The contrast highlights that the revenue-motivated
incentive to improve information quality is vastly weaker than the valuation-motivated one. Moreover, I also find better information quality strongly complements other two
prevalent policy tools in place, including increasing participation and using of Loss Share Agreements, which protects acquirers against future loss on acquired assets.
Exploiting this complementarity promotes more efficient auction outcomes. In the second chapter, I investigate the magnitude and economic mechanism of
spillover effects of bank failures. Specifically, I identify how each bank failure is affected by its peer banks' failures. Identification is obtained by exploiting the partial overlapping branch networks of banks. I nd peer failures lead to lower
failure probability for failed banks on average. Moreover, there exists significant heterogeneity in the spillover effects across different acquirer types. In particular, I find failure probability of an affected bank drops if the acquirer of the failed bank is also a peer of the affected bank. The results reveal that the industrial organization
structure among affected banks largely determines the direction and magnitude of the spillover effect. The findings also have important implications for the current policy
regarding the resolution of failed banks. In the third chapter, I study how changes in bank competition as a result of bank
M&As affect bank performances at the branch level, as well as the impact on local mortgage lending. I exploit the within-bank cross-branch variation in whether there is a merging counterpart branch nearby, as a variation in changes in local competition condition at the branch level. I find that M&As lead to higher deposit growth for all involved branches on average. However, branches with merging counterpart
branches nearby see a drop in deposits growth. Regions affected by M&As on average experience increase in mortgage loan denial rates, with an especially large increase
in the regions with counterpart branches located closely. The results highlight the geographical heterogeneity in the consequences of bank consolidation.