Vadasz, Tamas (2018) Essays in banking theory. PhD thesis, University of Warwick.

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Abstract

In the first essay (joint with Dr. Kebin Ma) we analyse a possible informational impact of banking regulations. Banks can take costly actions (such as higher capitalization, liquidity holding, and advanced risk management) to fend off runs. While such actions directly affect bank risks, they also carry informational content as signals of the banks' fundamentals. A separating equilibrium due to such signalling, however, involves two types of inefficiency: the high type chooses excessively costly signals, whereas the low type is vulnerable to runs. This provides a novel rationale for financial regulations: by restricting banks' actions, regulators can maintain a pooling equilibrium where the cross-subsidy among types promotes financial stability. We build a theoretical model to illustrate the point and also obtain supporting evidence from the US capital and liquidity regulations.

The second essay (joint with Prof. John Thanassoulis) seeks to provide a theoretical explanation of the variety of pricing schemes and product bundling observed in personal current account (PCA) markets. The main motivating fact is the widespread proliferation of `free-if-in-credit' (FIIC) current accounts in certain countries (US, UK), in contrast to some other European countries (France, Italy, Hungary), where even basic current account services are subject to excessive monthly fees. Existing evidence is consistent with the possibility that FIIC current accounts are cross-subsidized by exploitative and complicated fee structures on connected products, in particular by the excessive usage of overdraft facilities. In this research we propose a novel approach to model competitive aftermarkets, and demonstrate how certain sources of market power, namely customer naiveté and adverse selection interact in equilibrium. This helps to better understand why some markets are more likely to develop FIIC pricing than others.

In the last chapter I demonstrate how illiquidity is determined endogenously during crises as a result of equilibrium behaviour of financial institutions subject to leverage constraints. I show in a simple and intuitive framework that asset liquidation decisions exhibit similar characteristic to a Prisoners' dilemma: although financial institutions are given the possibility to dampen the cost of fire-sale spillovers, the only Nash-equilibrium is where banks 'defect', and end up coordinating on selling the more liquid common asset, which in turn becomes illiquid. This reduces welfare compared to the socially optimal de-leveraging rule.

Item Type:	Thesis or Dissertation (PhD)
Subjects:	H Social Sciences > HB Economic Theory H Social Sciences > HG Finance
Library of Congress Subject Headings (LCSH):	Banks and banking, Bank accounts, Liquidity (Economics), Banking law
Official Date:	September 2018
Dates:	Date Event September 2018 UNSPECIFIED
Institution:	University of Warwick
Theses Department:	Warwick Business School
Thesis Type:	PhD
Publication Status:	Unpublished
Supervisor(s)/Advisor:	Thanassoulis, John ; Ma, Kebin
Sponsors:	Warwick Business School, Finance Group
Format of File:	pdf
Extent:	vii, 173 leaves :illustrations, charts
Language:	eng

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