Essays on Bank Competition and Regulation
Creators: name: Siyu Lu
Publisher: name: Carnegie Mellon University
Year: 2019
Subjects: subject: 140207 Financial Economics
subject: FOS: Economics and business
subject: FOS: Economics and business

description: The systemic importance of banks in the fi nancial system and the economy hasvbeen long recognized by researchers and policymakers. Banks provide essential services<br>to both depositors and borrowers, facilitating all kinds of economic activities. This dissertation investigates the mechanism of bank competition and discusses its<br>implications on bank customers, systemic stability of the banking system, and related policies. In the fi rst chapter, I study the role played by bidders' information quality in<br>determining the allocative efficiency in auctions for failed banks. Taking advantage of the bidding data on failed-bank auctions during the most recent financial crisis, I<br>structurally estimate a first price auction model featuring conditionally independent private information to infer bidders' valuation distribution and noise distribution. Through counter-factual simulations, I fi nd a marginal reduction in bidders' noise leads to a signi ficant improvement in allocative efficiency, much larger than the improvement in auction revenue. The contrast highlights that the revenue-motivated<br>incentive to improve information quality is vastly weaker than the valuation-motivated one. Moreover, I also find better information quality strongly complements other two<br>prevalent policy tools in place, including increasing participation and using of Loss Share Agreements, which protects acquirers against future loss on acquired assets.<br>Exploiting this complementarity promotes more e fficient auction outcomes. In the second chapter, I investigate the magnitude and economic mechanism of<br>spillover e ffects of bank failures. Specifi cally, I identify how each bank failure is a ffected by its peer banks' failures. Identi fication is obtained by exploiting the partial overlapping branch networks of banks. I nd peer failures lead to lower<br>failure probability for failed banks on average. Moreover, there exists signi ficant heterogeneity in the spillover e ffects across diff erent acquirer types. In particular, I find failure probability of an a ffected bank drops if the acquirer of the failed bank is also a peer of the aff ected bank. The results reveal that the industrial organization<br>structure among a ffected banks largely determines the direction and magnitude of the spillover e ffect. The findings also have important implications for the current policy<br>regarding the resolution of failed banks. In the third chapter, I study how changes in bank competition as a result of bank<br>M&amp;As a ffect bank performances at the branch level, as well as the impact on local mortgage lending. I exploit the within-bank cross-branch variation in whether there is a merging counterpart branch nearby, as a variation in changes in local competition condition at the branch level. I find that M&amp;As lead to higher deposit growth for all involved branches on average. However, branches with merging counterpart<br>branches nearby see a drop in deposits growth. Regions affected by M&amp;As on average experience increase in mortgage loan denial rates, with an especially large increase<br>in the regions with counterpart branches located closely. The results highlight the geographical heterogeneity in the consequences of bank consolidation.<br> <br>