Download or read book Essays on Banking and Financial Intermediation written by Yuteng Cheng (Ph.D.) and published by . This book was released on 2022 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Chapter 1 uses a mix of theory and data to study the unintended consequences of mandatory retention rules in securitization. The Dodd-Frank Act and the EU Securitization Regulation both impose a 5% mandatory retention requirement in securitization to motivate financial intermediaries to screen and monitor their borrowers more carefully. To better understand the impact of the policy, this chapter studies two related research questions. First, can mandatory retention have unintended consequences? Second, is the current level of retention optimal? To answer those questions, I propose a novel trade-off model in which retention strengthens monitoring but may also encourage banks to shift risk. I go on to provide empirical evidence supporting this unintended consequence: in the data, banks shifted toward riskier portfolios after the implementation of the retention rules embedded in Dodd-Frank. Furthermore, the model provides clear testable predictions about policy and corresponding consequences. I show in the data that stricter retention rules caused banks to monitor and shift risk simultaneously. According to the model prediction, such a simultaneous increase can only occur when the retention level is above optimal, which suggests that the current rate of 5% in the US is too high. Chapter 2Chapter 2 studies the source of fragility of OTC-natured interbank markets. Most research on the fragility of interbank markets -in the sense of multiplicity of equilibria driven by adverse selection-relies on a competitive market structure. By contrast, this chapter accounts for the OTC market nature and the market power of some players. Under adverse selection alone, markets are not fragile; that is, the equilibrium is unique. However, when adverse selection is combined with moral hazard on the borrowers' side, multiple equilibria arise again, and the bad equilibrium exhibits troubled banks gambling for resurrection. An interest rate floor eliminates the bad equilibrium. More generally, policies to reduce fragility should address moral hazard rather than adverse selection. Chapter 3Chapter 3 studies the contracting differences between corporate loans that are sold in the secondary market and that are securitized in the CLO market. With secondary loan sales and CLO markets being the two markets for corporate loan commoditization, empirical studies find that banks add additional restrictive covenants to loans sold and looser covenants to loans securitized. Why is it so? This chapter builds a theoretical model to explain such contracting differences in these two markets. The key mechanism is that the bank alleviates the borrowers' moral hazard problem via public monitoring and charges higher interest rates due to the relaxing of incentives provided. Those high interest rates facilitate loan sales because the information problem embedded in loan sales is lessened. In contrast, adverse selection is less severe in securitization since the bank retains the information-sensitive tranche.