2025 Theses Doctoral

Essays in Financial Economics

Walz, Stefan

This dissertation includes three essays in financial economics, with a particular focus on banking and monetary policy. In the first chapter, Bank Regulation and Interest Rates: Reduced Form Evidence, I empirically study the implementation of bank regulation and trace out its effects on banks' holdings of government bonds.

In particular, exploiting the rollout of bank capital regulation in the 2010s, I uncover the effect of capital requirements on banks' holdings of longer maturity government bonds like Treasuries and MBS. I find in a triple difference specification that this treatment effect is particularly concentrated among regulated banks that entered the regulatory period with lower levels of capitalization, reinforcing the main finding in the baseline result. In the second part of the first chapter, I present a methodology to estimate the impact of banks' purchases of long term bonds on long term interest rates.

In the second chapter, Bank Regulation and Interest Rates: Aggregate Effects, I develop a bank portfolio choice model to rationalize and quantify the reduced form findings from the first chapter. The model includes heterogeneous banks, random short term interest rates, and inelasticity in deposit, loan, and bond markets. The key economic force in the model is that capital regulation incentivizes banks to increase their long maturity bond holdings in order to stay away from their capital requirement in low interest rate states when the rest of the balance sheet produces less income. I quantify the model to match key moments in the banking sector and I validate the model by matching the reduced form effect of bank capital requirements on banks' holdings of long term bonds from the reduced form section. The model quantifies significant aggregate effects of bank regulation on long term interest rates. I use the model study counterfactual policy designs that crowd-in banks' original portfolios while also allowing for greater capitalization in normal times. Overall, the paper highlights the role of bank regulation in affecting interest rates directly and its implicit role as part of the monetary policy toolkit.

In the third chapter, How Does the Fed Affect Corporate Credit Costs? Default Risk, Creditor Segmentation and the Post-FOMC Drift, I explore the persistence of the impact of monetary policy shocks on measures of corporate credit costs. After documenting that sudden changes in monetary policy have significant and lagged impact on corporate credit costs, I use a rich cross-sectional dataset to decompose the firm and creditor specific factors that drive the baseline finding. I find that the repricing position of firms, in particular the amount of assets that are due to reprice at new interest rate levels, significantly drives the response at both short and longer horizons, supporting a cash flow effect. Next, exploiting the fact that firms have multiple bonds outstanding at any given time, I find that the cross-section of credit holders matters only at a tight horizon and fails to explain the drift component.

Last, I provide suggestive evidence that aggregate broker dealer capital levels significantly amplify the response only after several days. The paper highlights the need to incorporate longer horizons in studying the link between monetary policy and financial markets.