Essays in Banking and Applied Econometrics.

Summary The capital of a bank is a key element of their soundness and in this thesis we examine its dynamics. Chapter 2 shows that the introduction of a deposit guarantee leads banks to increase their leverage. However, bank responses are heterogeneous: the effect decreases with size, systemicity and initial capitalization so that the largest banks and the initially least capitalized banks do not respond to the adoption of a deposit guarantee. Chapter 3 proposes a new measure to quantify the aggregate capitalization of banking sectors by considering market discipline and the regulatory framework. This index allows us to study how capital shortfalls relative to a bank-specific implied capital target induce aggregate credit fluctuations. The capitalization index is consistent with the Bank Lending Survey and is significantly correlated with future aggregate credit fluctuations, particularly during episodes of undercapitalization. Chapter 4 is not about bank capital but studies the impact of scientific standards and conventions (statistical significance levels) on the behavior of researchers. We identify irregularities in the distribution of t-stats from empirical papers and interpret these as the result of distorted incentives. Our identification allows us to separate publication bias from what we call inflation bias: the fact that researchers are tempted to inflate marginally rejected tests by choosing a "significant" specification.