Essays on Banking and Financial Regulations
Nguyen, Hai Xuan
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This dissertation consists of three essays on banking and financial regulations. Using analytical frameworks and historical perspectives, these essays investigate some of the most pressing issues underlying the regulatory structure of the United States, including regulatory competition, ``too big to fail," and shadow banking. The results provided herein help foster the discussion on future financial reforms. The first essay analyzes the welfare impact of supervisory shopping in the banking sector. Supervisory shopping leads to a welfare-increasing ``race to the top" among supervisors, if strong supervision increases banks' access to deposits by signaling that banks have a less risky balance sheet. However, if deposits are subsidized through an underpriced financial safety net, banks shop for a weak supervisor to maximize gains from risk-shifting. Supervisory shopping then precipitates a ``race to the bottom." In an extension of the framework, contingent convertible bonds (CoCos) prevent banks from risk-shifting, and supervisory shopping becomes socially desirable again. The second essay, which is a joint effort with Chang Ma, examines the optimal prudential regulations of large banks in the presence of an underpriced bailout guarantee. We evaluate policies that aim to mitigate the social costs of a bailout, including a capital requirement, direct cap on size, and tax on size. We find that each policy proposal improves social welfare in comparison with its absence; however, it cannot achieve the first-best level. In particular, bank size regulation inhibits banks' scale economies, because it curbs bailout costs by limiting bank size. To eliminate the use of public funds and the associated costs, we consider the issuance of CoCos to absorb banks' losses in the bad state. We find that a socially optimal investment scale can be implemented when CoCos are required. The third essay, which is a joint effort with Dang Du, reviews the history of financial regulatory developments in the U.S. via an examination of major regulatory reforms. While drawing on historical narratives of financial overhauls, we pay special attention to the issue of regulatory leakages that have led to the rise---in various forms---of unregulated short-term funding markets, ineffective regulatory regimes, and shadow banking. Our discussion highlights the fact that these leakages, which have been regarded as leading causes of the most recent financial crisis (2007--09), have deep roots in U.S. history.