| The world economy has encountered a number of banking crises, especially in the last two decades when financial markets emerged alongside banking sectors—Kaminsky and Reinhart (1999). Also, the regulatory authorities have recently introduced interbank competition and relied upon bank capital to regulate the banking sector. In my dissertation, I examine these developments from a theoretical viewpoint, focusing on the properties of a laissez-faire financial system and the effects of governmental prudential policies.; In Chapter 1, I show that the promotion of interbank competition does not jeopardize the financial health of the banking sector. In fact, interbank competition induces individual banks to diversify lending, thereby making the banking sector healthier and safer. I also show that the introduction of the direct debt market does not affect the stability of financial system as long as a minimum capital-to-asset ratio is in place. I propose a less stringent minimum capital-asset ratio for a well-diversified bank, especially when its lending is diversified among the several sectors whose performances are imperfectly correlated.; In Chapter 2, I aim to explain the boom and bust cycles that followed financial liberalization—a common chain of events occurred in Japan and the Scandinavian countries during the 1980s and the 1990s. I construct a model where, under certain circumstances, the banking sector initiates a lending boom after the introduction of the direct debt market. The analysis here implies that the less efficient the banking sector is, the larger the size of the direct debt market is, and the more likely the lending boom occurs.; In Chapter 3, I analyze the interaction between the possibility of bank runs and banks' excessively risky lending. I show that, in a laissez-faire financial system, banks do not seek excessively risky lending because they abhor bank runs. Deposit insurance eliminates such market discipline although it could prevent runs. The economy then needs additional governmental interventions to prevent excessively risky lending; as a consequence, depositors may be worse off in the regulated regime than in the laissez-faire regime. |
