Essays on U.S. Banking Regulatory Reforms and Banking Operations

Abstract

My dissertation empirically addresses some unanswered questions that have motivated much debate among banking practitioners, government lawmakers and economists by investigating two natural experiments provided by regulatory reforms.

The first study examines the impact of the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) on market discipline in the U.S. banking industry. I employ the Granger causality test with Arellano-Bond’s GMM technique to measure the "timeliness" of market discipline by testing whether changes in bank risk have predictive power for changes in Jumbo CD interest rate spreads. I also consider how this power has been impacted by the enactment of the FDICIA. Furthermore, I test the "effectiveness" of market discipline by testing the predictive power of changes in interest rate spreads for changes of accounting risk measures in order to examine whether banks take any “self-correction” actions. The findings support the hypothesis that both the "timeliness" and "effectiveness" of market discipline from the Jumbo CD holders have been significantly improved since the enactment of the FDICIA in 1991.

The second study examines commercial banks’ strategic choices regarding the interstate branching mode: de novo branching vs. mergers and acquisitions. It also analyzes the impact of this choice on branch performance in the host market.Two-step Heckman estimation is employed in tackling the selection endogeneity problems. The results show that under several well-defined circumstances, de novo interstate branching mode is preferred to M&A. Furthermore, entrant banks choosing interstate branching via M&A have absolute performance advantages over entrant banks setting up de novo branches. Moreover, derived counterfactual performance outcomes indicate that both groups of banks categorized by their choice of interstate branching mode seem to have made the right decision. Therefore, free interstate de novo branching might encourage more small banks to enter, which could prove beneficial to the development of small business within the host state without posing much threat to incumbent banks.