THESIS
2021
1 online resource (xii, 42 pages) : illustrations (some color)
Abstract
Chapter 1 studies a regulator’s optimal information disclosure in banking sector,
where the disclosure not only reflects the types of the banks but also endogenously impacts
the business activities of banks. Vague disclosure can pool some weak banks with strong
banks, which lowers the weak banks’ financing costs and thus reduces their incentive to
take on excessive risk. However, pooling too many weak banks with strong banks can
cause a credit market breakdown. Thus, there is an optimal precision of information
disclosure to maximize the social welfare. When banks have multiple project choices, the
regulator need to compare two regimes: a lower degree of pooling which induces highly
safe projects (quality regime) and a higher degree of pooling which induce moderately
safe projects (quan...[
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Chapter 1 studies a regulator’s optimal information disclosure in banking sector,
where the disclosure not only reflects the types of the banks but also endogenously impacts
the business activities of banks. Vague disclosure can pool some weak banks with strong
banks, which lowers the weak banks’ financing costs and thus reduces their incentive to
take on excessive risk. However, pooling too many weak banks with strong banks can
cause a credit market breakdown. Thus, there is an optimal precision of information
disclosure to maximize the social welfare. When banks have multiple project choices, the
regulator need to compare two regimes: a lower degree of pooling which induces highly
safe projects (quality regime) and a higher degree of pooling which induce moderately
safe projects (quantity regime). Importantly, as banks’ debt ratios increase, the optimal
regime changes from quantity to quality and finally back to quantity. My model explains
why, after a negative economic shock, some countries choose to disclose more information
in banking sector, while some countries choose to disclose less information.
Chapter 2 presents a rational expectations model of credit-driven crises, providing
a new perspective to explain why credit booms can lead to severe financial crises and aftermath
slow economic recoveries. In our model economy, banks can operate in two types
of business à la Minsky’s narratives. They are sequentially aware of the deterioration of
fundamentals of the speculative business and decide whether to continue credit extension
in that business or liquidate capital and move into the traditional business. However, because
individual banks face uncertainty about how many of their peers have been aware,
they rationally choose to extend credit in the speculative business for a longer time than
is socially optimal, leading to an over-delayed crisis and consequently more banks being
caught by the crisis. This in turn renders the financial crisis more severe and the subsequent economic recovery slower. Within a standard textbook macroeconomic growth
setting, our model generates rich dynamics of economic booms, slowdowns, crashes, and
recoveries.
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