Essays on bank funding structure

Williams, Emily (2017) Essays on bank funding structure. Doctoral thesis, University of London: London Business School.

Abstract

In this thesis I study the determinants of the funding structure of banks. In the first essay, I document size-related financing frictions at U.S. commercial banks and show that these frictions lead to a reduction in bank lending when the Federal Reserve raises interest rates. I identify these effects by exploiting a natural experiment us- ing anti-trust related bank branch divestitures in which branches are divested from large banks to small banks such that the market structure remains unchanged. Consistent with the existence of financing frictions in a framework where deposit demand is a function of the opportunity cost of money, I find evidence consistent with the existence of a bank lending channel of monetary policy. In the second essay I show that a simple measure of bank liquidity creation - defined as a banks fraction of runnable debt funding to total liabilities - does well at predicting bank stock price performance and crash risk during the recent financial crisis. I find that banks that fund themselves more with runnable debt prior to the financial crisis, have lower market betas, lower crash risk, and superior stock price performance when the market is in a left tail relative to banks that fund themselves with less runnable bank debt. These findings are in contrast to existing studies on the relationship between bank liquidity creation and liquidity risk. The third essay studies the impact that treasury supply has on bank funding and ultimately on bank assets and liabilities. We use exogenous shocks to treasury supply to assess the impact of changes in the supply of treasuries have on banks, independent of changes in the Federal Funds rate and hence short term demand for liquid assets. Consistent with a collateral channel, a negative shock to treasury supply makes treasuries scarcer, costlier to hold on bank balance sheets and reduces the amount of liquid debt & loans the bank supplies. These findings highlight the important role that collateral plays in understanding prices and quantities changes in the market for near-money assets.