Electronic Thesis/Dissertation


Essays on Bank Risk-taking and the Bank-lending Channel of Monetary Policy Transmission Open Access

Downloadable Content

Download PDF

My dissertation research focuses on financial intermediaries and monetary policy transmission. It contains three essays that examine different aspects of the financial institutions and regulation. The first essay examines the state ownership, foreign acquisition, and risk-taking behavior of commercial banks in China. The empirical results confirm that state-ownership does lead to higher risks of banks and that foreign acquisition lowers state-owned banks' risk-taking in China. The results show that banks controlled by the central government have the highest credit risk, while those owned by local governments have the lowest capital adequacy ratio. By compiling a complete list of cross-border acquisitions in China's banking sector, we investigate the impact of foreign acquisition on state-owned banks' risk-taking using differences-in-differences and matching estimators. We find that foreign acquisition has a reducing effect on state-owned banks' risk-taking and this effect is particularly significant for banks that are controlled by central or local government. We also find that this risk-reducing effect depends on the percentage of foreign ownership, the local business involvement of the foreign investors, and the number of foreign members on the banks' boards of directors.The second essay addresses an interesting and well-timed topic related to the bank-lending channel of monetary transmission. It explores the impact of the unconventional monetary policy (the Federal Reserve's quantitative easing (QE)) on banks’ lending propensity before and after the 2008 financial crisis. Using a data set that includes quarterly observations of every insured U.S. commercial bank and bank holding company from 2000Q1 to 2013Q3, we find that conventional monetary is no longer effective in changing bank's lending propensity. Further analysis indicates that the first round of the quantitative easing was the most effective in increasing banks' lending propensity. This paper provides direct evidence that the impact of unconventional monetary policy on lending is larger for banks with less liquid balance sheets (i.e. banks with less liquid asset and cash holding). In addition, it shows that internal capital markets were active in global banks in that they responded to the unconventional monetary policy by increasing their foreign office lending.The third essay follows the idea of the second essay and takes one step further to study the cross-border transmission of the Federal Reserve's balance sheet policies. It examines the real effect (bank-lending effect) of the Federal Reserve's QE policy and tries to gauge the impact of the QE on the global liquidity. More specifically, the research questions of interest are as follows: (1) Has the U.S. cross-border bank lending changed during the three episodes of QE? Consistent with the ``flight home" and ``flight abroad" effect of international lending that has been well-documented in the literature, we show the procyclical cross-border banking capital flows to the emerging market economies during and after the 2007-2009 financial crisis. (2) Is this increase in cross-border lending telling us a search-for-yield story, where interest rate or certain macroeconomic variables can explain the geographical pattern of the lending? Our results show that besides the fundamental economic push and pull factors of the host and home countries, the geographical locations (i.e. distance between lenders and borrowers), institutions (i.e. political stability, regulatory quality, rule of law, and corruption), and the economic uncertainty level would also affect the lending patterns across countries. (3) To what extent do the global banks' domestic and international lending activities in response to QE depend on bank-level (lender) characteristics? If the cross-border spillover can be partly attributed to the liquidity shock, then different banks would exhibit different lending patterns in response to this shock. Our results show that banks' liquidity and required capital levels are both important in determining their cross-border lending. In general, by answering these questions, we tell a comprehensive story of the international spillover effect of Federal Reserve's balance sheet policies via the international credit market.

Author Language Keyword Date created Type of Work Rights statement GW Unit Degree Advisor Committee Member(s) Persistent URL