Essays on Banking and Finance

Alnahedh, Saad

Graduate Thesis Or Dissertation

Essays on Banking and Finance Public Deposited

Analytics

Citations

Citeable URL: https://scholar.colorado.edu/concern/graduate_thesis_or_dissertations/sq87bt762

Abstract

Using a sample of 178 publicly traded Bank Holding Companies (BHCs) in the period between 1994 and 2014, the first chapter provides evidence on the relation between a bank's equity capital ratio and the cost of capital. To address endogeneity between a bank's equity capital ratio and risk of balance sheet assets, we use an instrumental variable (IV) approach, as well as a triple differences (DDD) approach. The IV strategy exploits time-series and cross-sectional exogenous variation in statutory state income taxes levied on banks to instrument for the endogenous book equity capital ratio. The DDD approach examines treated banks, defined as having had a tax increase or decrease shock, against entropy balanced sample of control banks operating in states that did not experience tax shocks during the event window. When states increase statutory state tax rates, BHCs respond by decreasing their book equity capital ratio (increasing leverage) relative to peer out-of-state BHCs. We argue this causes the subsequent decrease in a bank's cost of capital. We find that a 10 percentage point increase in the book equity capital ratio is associated with a 92 basis points increase in the bank's cost of capital. We also find that a 10 percentage point increase in the market equity capital ratio is associated with a 59 basis points increase in the bank's cost of capital. Restricting the analysis to large banks with book assets in excess of $50 billion, we find that a 10 percentage point increase in the book equity capital ratio is associated with a 23 basis points increase in the bank's cost of capital. Even though an increase in the equity capital ratio is associated with a private cost to the banks, the effects on bank lending is positive. We find that a 1 percentage point increase in the book (market) equity ratio is associated with a 1.69 (1.21) percentage point increase in bank-level new lending growth. Given the social and economic welfare costs of excessive risk taking by banks through leverage, the results in this paper indicate that raising equity capital requirements is not as costly banks claim.The second chapter examines the impact of a recent regulatory reform. Implosion of the Money Market Fund (MMF) industry in 2008 has raised alarms about MMF risk-taking; inevitably drawing the attention of financial regulators. Regulations were passed by the U.S. Securities and Exchange Commission (SEC) in July 2014 to increase MMF disclosures, lower incentives to take risks, and reduce the probability of future investor runs on the funds. The new regulations allowed MMFs to impose liquidity gates and redemption fees, and required institutional prime MMFs to adopt a floating (mark-to-market) net asset value (NAV), starting October 2016. Using novel data compiled from algorithmic text-analysis of security-level MMF portfolio holdings, as reported to the SEC, this paper examines the impact of these reforms. Using a difference-in-differences analysis, I find that institutional prime funds responded to this regulation by significantly increasing risk of their portfolios, while simultaneously increasing holdings of opaque securities. I also find that opaque holdings is associated with significantly higher fund yields compared non-opaque asset class holdings. Large bank affiliated MMFs hold the riskiest portfolios. This evidence suggests that the MMF reform of October 2016 has not been effective in curbing MMF risk-taking behavior; importantly, MMFs still pose a systemic risk to the economy given large banks' significant exposure to them.

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