Essays on Macrofinancial Policies and Bank Regulations

UoM administered thesis: Phd

  • Authors:
  • Marcin Michalski


This thesis consists of three essays on macroprudential policies and the regulation of the banking system. Two empirical essays evaluate the effects of macrofinancial policy developments which have taken place in the aftermath of the 2007 - 2009 Financial Crisis on the operations of the U.S. bank holding companies. A third, theoretical essay, examines the financial stability policy of a central bank serving as both the lender of last resort and the financial system's regulator. The first essay examines the impact of macrofinancial policies on the process of liquidity creation undertaken by U.S. bank holding companies. It focuses on three major policy developments: bank capital regulation reform, monetary stimulus through quantitative easing, and the Troubled Asset Relief Program (TARP). The results shows that the dynamics of liquidity creation differ considerably between small and large banks. The level of bank capital requirements and the stance of monetary policy affect the liquidity creation of small and medium-sized banks, but not the largest institutions which control over 80% of the banking system's assets. In contrast, TARP has only short-term effects on small and medium banks, and leads to a long-term decline in liquidity provision per dollar of assets of the largest banks. The second essay examines the effects of changes in bank regulatory environment on the risk, return, and liquidity characteristics on equity portfolios of U.S. bank holding companies between 1997 and 2016. It assesses the impact of the repeal of the Glass-Steagall Act, the introduction of the second and third Basel Accords, and the implementation of the Dodd-Frank legislation on institutional portfolios. It documents a significant increase in both the idiosyncratic volatility and illiquidity of banks' portfolios during the period of financial deregulation initiated by the removal of restrictions prohibiting banks from engaging in securities trading. In contrast, the subsequent reforms of bank capital requirements and the prohibition of banks from proprietary trading activities lead to reductions in those metrics. The results suggest that banks' restricted ability to engage in market-making is only partially offset by the activities of hedge funds. Finally, the model of a macrofinancial system developed in the third essay accommodates the possibility of financial contagion through interbank market linkages, and adverse feedback from the financial system to the real economy. It identifies the relative riskiness of the agents in the financial system, the probability of systemic distress, and the expected duration of credit supply reduction, as the key factors influencing the design of financial stability policy. Model simulations indicate the existence of a substitution effect between reducing the expected scope of a central bank's assistance to an institution in distress and increasing bank reserve requirements.


Original languageEnglish
Awarding Institution
Award date1 Aug 2019