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Essays on banking in macroeconomics

Yi, Yu (2023) Essays on banking in macroeconomics. PhD thesis, London School of Economics and Political Science.

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Identification Number: 10.21953/lse.00004589


How does bank capital affect the relationship between bank concentration and risk taking? Chapter 1 presents a tractable dynamic model that incorporates heterogeneous financially constrained entrepreneurs and an imperfectly competitive banking sector. When the bank capital ratio exceeds the minimum requirement, reducing bank concentration leads to more risk taking; otherwise, the concentration-risk relationship is ambiguous. To explain the equilibrium characterization, I propose two mechanisms, a net margin mechanism and a risk shifting mechanism, whose direction depends on banks’ optimal decisions regarding loan quantity and the accumulation of excess bank capital. Considering the risk shifting mechanism and the non-binding capital constraint, the model suggests a non-monotonic relationship between bank concentration and loan rate, which is supported by the micro-level evidence in the U.S. The two mechanisms also jointly establish a non-monotonic relationship between bank concentration and allocative efficiency. I discuss how efficiency and stability can be enhanced simultaneously. Chapter 2 streamlines and refines the theoretical framework presented in Chapter 1, with a particular emphasis on efficient allocation. The model demonstrates that an increase in bank concentration leads to an increase in bank capital and potentially a non-binding capital constraint. I use the model to understand how bank concentration affects misallocation through the interaction between bank concentration and bank capital when the financial market is imperfect, which is referred to as the “bank capital channel”. This channel suggests that banks over-accumulate equity capital in terms of allocative efficiency. Chapter 3 presents a general equilibrium model that incorporates the effects of collateral constraints and screening costs. The model reveals that a transitory productivity shock is amplified and prolonged through collateral constraints and a countercyclical average screening cost. This countercyclicality depends on firms’ optimal decision between screened and unscreened capital. Moreover, higher screening costs serve to mitigate amplification while enhancing persistence.

Item Type: Thesis (PhD)
Additional Information: © 2023 Yu Yi
Library of Congress subject classification: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
Sets: Departments > Economics
Supervisor: Zhang, Shengxing

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