Essays in banking

Stanciu, Irina (2024) Essays in banking. PhD thesis, London School of Economics and Political Science.

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Abstract

In the first chapter I study the way in which monetary policy rates and capital and liquidity ratios are reflected into the prices of loans and deposits. I start from banks’ profitability approach to disentangle two transmission channels: (i) through the cost of funds and (ii) through loan and deposit spreads. I use bank-level panel data to estimate these channels and then assess the correspondence with theoretical models of financial frictions, suggesting an extension to current DSGE models. When it comes to modelling the banking block, I suggest a simple extension that takes into account wholesale funding. The money-market rate banks pay on wholesale markets can simply be equal to the monetary policy rate. However, we can move a step closer to industry best practices and allow for it to be a function of capital and liquidity positions, in line with what counterparty credit risk assessments would suggest. In the second chapter I show how liquidity constraints, coupled with banks’ excessive government exposures lead to a negative feedback loop that reduces credit to the real economy because of deteriorating sovereign creditworthiness. Liquidity requirements improve banks’ resilience when faced with liquidity shocks. However, they may also lead to a reduction in lending to the private sector. The third chapter presents an estimation of the reversal rate, for both lending and deposit rates. Initially the idea of a reversal rate was introduced as the rate at which accommodative monetary policy becomes contractionary for lending. This is linked to the literature that has proposed low nominal rates can reduce and even reverse expansionary monetary policy. We find evidence of a threshold at −0.4%. Below this threshold, deposit rates stop responding to the monetary policy rate, while the sensitivity of lending rates to the policy rate changes sign, becoming negative.

Item Type:	Thesis (PhD)
Additional Information:	© 2024 Irina Stanciu
Library of Congress subject classification:	H Social Sciences > HG Finance
Sets:	Departments > Finance
Supervisor:	Oehmke, Martin and Ray, Walker
URI:	http://etheses.lse.ac.uk/id/eprint/4822

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