In Chapter 1 of my dissertation, I study how should the banking system be designed under a setting where markets and contracts are incomplete, to most efficiently create the private money in an economy (i.e., bank deposits), which need to be made both liquid and safe. I identify three market failures: an incentive problem, a commitment problem, and a coordination problem, as consequences of the combination of a safe asset creation constraint under liquidity risks with certain markets (and contracts) being missing. A competitive banking market is shown to have a mixed effect on efficiency: It alleviates the incentive problem, which is more economically relevant when the economy is subject to idiosyncratic shocks; but it exacerbates the commitment problem, which becomes more relevant when the economy is subject to systemic shocks. Finally, I show that a coordination problem arises when banking markets become sufficiently competitive: no private safe assets can be created in the economy without proper liquidity being imposed. Chapter 2 of the dissertation empirically investigates how competition in bank funding markets generates real impact through affecting the determination of short-term liquidity prices for banks. Exploiting the exogenous variation in banking market competition resulting from the US banking deregulation in 80s and early 90s, I document two novel facts. First, while banks’ loan making is generally less local than deposit taking, more competitive banking market enlarges this geographic mismatch. Second, examination of the lending dynamics of banks hit by the 1986 oil price shock reveals a mixed effect of banking market competition on economy’s resilience to unexpected shocks–it attenuates idiosyncratic shocks but amplifies systemic shocks. In Chapter 3, we document the rise of domestic global banks in EMEs and the increasingly important role they play in channeling cross-border capital since 1990s. We show that this structural change in the cross-border credit flow to EMEs is likely to be driven by the transformation in the U.S. money market since around 1990. Importantly, we find that domestic banks from EMEs, who are replacing foreign banks’ role of channeling cross-border capital to EME firms, behave drastically differently in choosing their lending bases. We further show that the rise of domestic banks in the transmission of cross-border capital to EMEs has a far-reaching impact on these economies. In particular, we find that it reshaped industry structure of these economies and increased their susceptibility to global financing cycles. Chapter 4 of my dissertation exploits a unique cross-region heterogeneity of domestic global bank distribution in China and based on which, we investigate the real effects of the structural difference in cross-border credit across cities in China during the 2003-2009 global financing cycle. Our empirical findings show that the enlarged flexibility in cross-border credit contracting, which is made possible by the rise of domestic global banks in EMEs, is a mixed blessing to these economies: It allows the hot money flowing to EMEs to be more efficiently allocated, but may lead to less efficient allocation of domestic credit when hot money leaves.




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