Financial Competition and Regulation Since the Great Recession



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In the first chapter of this work, "Commercial Bank Competition, Riegle-Neal, and Dodd-Frank," I employ a linear systems of equations technique to examine commercial banks competitiveness over the period since the passage of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, with particular attention to whether there are any observable changes in the state of competition since the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, as one of the most commonly expressed concerns with Dodd-Frank has been that its increasing fixed compliance costs of regulation may have increased market power in the American banking system. Per the common wisdom, I find small pro-competitive effects of Riegle-Neal and small anti-competitive effects of Dodd-Frank. In my second chapter, "The (Not So) Quiet Life of Commercial Bankers," I address a literature that has emerged in recent years in which it is contended that the growth of mutual and index funds has fostered oligopoly collusion in commercial banking and airlines by solving the oligopoly defection problem. Focusing on the case of banking, this paper challenges a key pillar of their theory: the “quiet life” hypothesis, which claims that common ownership leads to the selection of executives who are less likely to exert high effort to maximize profits. An event study is conducted evaluating stock market responses to executive hiring announcements in order to discern whether executives hired in the six largest commercial banks are viewed by markets as less motivated than their predecessors. No evidence of such market perceptions is found. In my final chapter, "The Role of Moral Hazard in the Housing Boom and Bust," I examine the nature of moral hazard relationships in housing regulation from the 1970s until the housing crash in 2007 and how policy played a role in promoting problems of asymmetric information. I describe the crisis as engendered by a three-tiered moral hazard relationship between borrowers and lenders, lenders and government-sponsored enterprises, and between government-sponsored enterprises and the federal government. Taking the perspective of ten years after the crisis, I examine the extent to which policies that promoted moral hazard problems have or have not changed, finding moral hazard relationships to have been partly mitigated by the Department of Housing and Urban Development's takeover of the GSEs but bringing with it the more long-term concerns that come with operating under a "soft budget constraint."