Three Essays in Financial Economics

Abstract

This thesis investigates how financial institutions and policies by public institutions shape credit market dynamics. I focus on the roles of monetary policy, government credit programs, and macroprudential regulation. The thesis consists of three self-contained essays that study the behavior of banks and borrowers in various institutional and policy contexts. <br/> The first chapter shows that monetary tightening can induce banks to engage in evergreening—expanding credit supply, in particular to risky firms with maturing loans—to avoid recognizing losses. Using euro area loan-level data, I exploit variation in banks' internal default probability estimates and monetary policy shocks to identify a credit supply channel. The rollover needs of risky firms attenuate the contraction in credit supply following monetary tightening. This behavior weakens monetary transmission for risky firms and may raise long-term financial stability risks. <br/> The second chapter provides causal evidence that an exogenous expansion of mortgage credit through the U.S. VA loan program led to persistent increases in house prices. This price growth triggered a net credit supply expansion in the conventional mortgage market, creating a feedback loop between credit supply and house price expectations. Our findings are consistent with the idea of a potential amplification of the initial credit supply shock by additional credit due to adjusted house price expectations. <br/> The third chapter compares the effects of monetary and macroprudential policies on corporate lending rates in the euro area. We find that even modest monetary policy changes have a stronger effect on lending rates than sizable shifts in macroprudential buffer capital requirements. However, macroprudential tools become relatively more important when policy rates are near zero, bank capital is high, or bond market alternatives are limited.