Essays in Asymmetric Information and Financial Intermediation

Abstract

This collection of essays studies informational frictions and financial intermediation. Chapter 1 studies an asymmetric information friction in banking relationship. I show that banks with an existing relationship with a borrower know more than banks without a relationship. This information gap reduces the reallocation of credit after a shock to the banking sector. Quantitatively, this friction explains $15 billions of the decrease in lending in the U.S. syndicated corporate loan market after the recent financial crisis. Chapter 2, co-authored with Alexander Rodnyansky, studies the effect of quantitative easing (QE) on bank lending behavior in the United States. We show that banks holding more mortgage-backed securities on their balance sheet expand lending more after the first and third round of QE relative to other banks. The second round of QE had no effect, as the Federal Reserve purchased Treasuries that are sparsely held by banks. These results suggest that the type, as opposed to merely the quantity, of assets purchased in key. Chapter 3 investigates whether taxpayer money is best spent on supporting the financial sector or the real sector in times of crisis. I introduce a model in which the financial sector is plagued by a collateral friction, while the real sector is plagued by adverse selection. I show that public lending to banks are cheaper for the taxpayer than lending to entrepreneurs directly. Supporting the financial sector allows taxpayers to share with bank investors the downside risk of lending.