Three Essays in Bank Risk Management

Bank risk management has undergone a substantial transformation over the last decade. This is a direct result of the financial crisis. This dissertation presents three studies of bank risk management from a post-crisis perspective. The first essay studies U.S. housing market volatility. The financial crisis began with the bursting of the housing bubble. Much has been written since then about what drives the level of house prices. However, little work has been done to investigate the drivers of house price volatility. Mortgage assets on bank balance sheets are short default options, the values of which are increasing in house price volatility. It is therefore important for banks to understand this risk factor. We find that much of house price volatility is due to time-variation in idiosyncratic local housing market risk premia versus local growth. The second essay studies the effects of internet banking on customer behavior. Internet-based financial services have grown substantially since the crisis, especially amongst \textit{de novo} post-crisis fintech firms and banks. Much has been written about the characteristics of banks the engage in internet banking, focusing on their financial health. However, little is known about the effects of internet-based banking services on customer behavior. I find that internet-active banking customers exhibit higher brand loyalty. This increase in brand loyalty appears to be in part due to the internet banking experience itself. This improves bank balance sheet health substantially by reducing funding costs and liquidity risk. In the U.S. the policy response to the financial crisis was the Dodd-Frank Act. The Dodd-Frank Act requires stress testing of U.S. banks with assets in excess of \$10 billion. Although banks below this asset threshold, community banks, are not considered systemically important, they are critically important to the health of the U.S. economy. In the third essay we estimate a top-down stress testing model and apply it to U.S. community banks. We find that a large percentage of community banks have non-trivial exposure to the stress events contained in the Federal Reserve stress test scenarios. If an event resembling the Great Recession were to reoccur a large portion of community banks would become undercapitalized.

Grantor dc:publisher

University of Kansas

Year dc:date.issued

2018

Author dc:creator

• Fairchild, Joseph R

Advisor dc:contributor.advisor

• DeYoung, Robert

• Finance

Statement dc:rights

• Copyright held by the author.

Language dc:language.iso

en

Dc Identifier Other

http://dissertations.umi.com/ku:16020

OAI identifier oai:identifier

oai:kuscholarworks.ku.edu:1808/37461