Foote, Elizabeth Ellen
(2011)
Essays in financial intermediation and banking.
PhD thesis, London School of Economics and Political Science.
Abstract
Banks' role as intermediaries between short term investors and long term borrow-
ers has dominated the literature. Whilst this is an important feature, there are many
other characteristics of banks. Each chapter in this PhD explores a different aspect
of banking, from other forms of lending to banks' role in payment services. The first,
and principal, chapter considers credit lines: `commitments' to lend if required. These
remain off the bank's balance sheet until drawn upon. As off-balance sheet items,
unused commitments face low capital charges under existing capital regulation. I ex-
plore how this regulatory feature incentivises banks to build up exposure to these lines.
This may lead to a suboptimal allocation of credit, ex post, following a market shock,
as high drawdowns cause the balance sheet to balloon and the capital requirement
to bind. In the second chapter, I consider banks as agents in large-value payment
systems. In choosing the optimal time to settle a payment, banks trade off delay costs
against the risk of having insuffcient liquidity to make future payments. With banks
participating in multiple systems, I show how default in one system may spill over into
another, through the strategic behaviour of multi-system participants. I explore how
this risk varies with the degree of information asymmetry between agents in different
systems. The third chapter focuses on retail banking. In joint work, we examine how
the provision of consumer credit, either through current account overdrafts, or through
credit card credit lines, affects the way in which debit and credit card networks com-
pete. We find that, even when debit and credit cards compete, there are elements
of complementarity between them. Banks providing debit cards and current accounts
benefit when the consumer delays withdrawal of funds from her current account by
using a credit card. This leads to surprisingly high debit merchant fees.
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