An economic analysis of bank risk-taking : stability, deposit contracts and lending relationships
This thesis provides an economic analysis of bank risk-taking, addressing the relation between stability and competition, the efficiency of demandable debt as an incentive device for bankers, and the interaction between the structure of credit relationships, bank monitoring and loan rates. Chapter 1 reviews the literature on stability, regulation and competition in banking. The survey is organised around two dimensions of instability: vulnerability to runs and panics, and excessive risk taking. It turns out that the existing literature largely ignores the impact of competition on stability and on the optimal regulatory design. The very few models addressing these issues do not provide conclusive results. Chapter 2 goes deeper on the phenomenon of bank runs. A unified framework is presented within which the main literature is outlined and compared. Chapter 3 develops a model that analyses both the benefits and the costs of market discipline as an incentive device for bankers. It is shown that demandable debt, by allowing for the possibility of runs, can induce bankers to monitor their projects. However, market discipline comes at a cost. Since depositors are not equally informed about bank future solvency, they may commit mistakes in their withdrawal decisions, forcing the closure of a solvent bank or permitting the continuation of an insolvent one. Chapter 4 turns the attention to the lending side, developing a model of overlapping moral hazard problems between banks and firms. The aim is to study how the number of bank relationships affects banks' monitoring decisions and how these affect loan rates and firms' choice between single and multiple relationships. It is shown that multiple lenders monitor less than a single lender, but they don't necessarily require higher loan rates. The firm's choice between single and multiple relationships is not univocal, depending on the severity of bank moral hazard as compared to firm moral hazard.