ORGANIZATION, COORDINATION, AND REGULATION: THREE ESSAYS ON THE THEORY OF BANKING (PRINCIPAL, AGENT, CONTRACTING, PORTFOLIO)

The bank failures and financial sector consolidation that have accompanied bank deregulation have renewed interest in banking. In this dissertation I explore three aspects of banking.;Essay 2. "Capital Adequacy and the Discount Mechanism." Deregulation has exposed the degree to which banks are under-capitalized as a result of limited liability and deposit insurance. In this essay bank capital is held in an interest bearing escrow account at the Fed to collateralize deposits and discount window borrowing, and as security against loan losses. Capital adequacy requirements are set contingent on portfolio risk. The Fed induces banks to reveal truthfully the riskiness of their portfolios and maintain adequate capital by disclosing bank riskiness, charging penalty rates on discount window borrowing, and linking discount window privileges to pledged capital. Capital requirements vary with market conditions thus providing a channel for monetary policy in the absence of noninterest bearing reserves.;Essay 3. "Bank Portfolio Management: The Loan Officer Incentive Problem." In this essay a bank is modelled as a bi-level firm. At the upper a single profit maximizing agent decides how a portfolio should be allocated among differing types of loans, and motivates risk averse loan officers, at the lower level, to make these loans. The model is of the single-period principal-multi-agent genre. Three key results are derived: increases in deposit costs increase bank risk-taking; a higher proportion of a bank's portfolio is placed in high return variance loans than in like-mean, lower variance loans; for a risk neutral bank high portfolio diversification may not indicate low portfolio risk.;Essay 1. "The Loan Contract: Mechanism of Financial Control." This essay shows that a bank specializing in the financial needs of an industry can effect industry control. Specifically, a bank through its loan contract can set industry output at the monopoly level and extract the entire surplus from collusion if the firms in the industry cannot collude directly because of asymmetric information, signalling problems, and/or anti-trust restrictions.