The first essay (Chapter 2) highlights the positive effect of banks on direct financing in a setting where each agent believes that she can evaluate information better than any other agent. Banks emerge endogenously and they encourage direct financing through the use of underwriting and liquidity (reserve) requirements. Banks sell underwriting contracts to investors who wish to invest directly. Bank reserves reassures direct investors that the underwriting contract will be fulfilled. This results in the financing of positive NPV projects that were previously denied credit. In the second essay (Chapter 3) an entrepreneur has the choice to access either monitored bank financing or un-monitored bond financing. Project type is private information of the entrepreneur and as a consequence, in the unregulated equilibrium, there is some inefficient over-monitoring by banks when the banking sector is competitive. Bank lending becomes more efficient and the net interest margin falls as bond financing becomes cheaper and the bond market expands. In contrast, if the banking sector is monopolistic, the equilibrium is either efficient or there is inefficient under-monitoring by banks. The final essay (Chapter 4) proposes a model of optimal bank capital structure. There are two types of potential investors with different monitoring skills. The skilled can monitor a project and increase its productivity, whereas the unskilled cannot. Also, the skilled can divert a part of the project’s return without being detected by the unskilled. Banks emerge endogenously and bank capital structure is relevant. The skilled become the bank’s equity-holders whereas the unskilled become depositors. Our model explains why bank equity is more expensive than deposits.
| Identifer | oai:union.ndltd.org:bl.uk/oai:ethos.bl.uk:640943 |
| Date | January 2014 |
| Creators | Biswas, Swarnava |
| Publisher | University of Warwick |
| Source Sets | Ethos UK |
| Detected Language | English |
| Type | Electronic Thesis or Dissertation |
| Source | http://wrap.warwick.ac.uk/66434/ |
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