UC Irvine

This dissertation studies the US housing market, banks' behavior under regulations and effects of bank capital constraint on the monetary transmission mechanism. It revolves around understanding the determination of the capital regulations on banks' optimal behavior, as well as quantifying the impact of these regulations on the effectiveness of the monetary policy.

The first chapter, “The Impact of Local School Quality on Housing Price Volatility”, studies the effects of local school quality on housing-price booms and busts under the impact of exogenous credit-supply shocks, using school-district-level data in California between 2000 and 2012. The analysis shows that school quality, as an important amenity and utility dividend, reduces the impact of the exogenous shocks and anchors local housing values. The empirical work verifies that better schools make housing prices less volatile. The findings match the analysis of previous research in financial markets, in which there is a similarly negative association between share prices volatility and dividend yields.

The second chapter, “How Do the Minimum Capital Requirements Affect Banking Competition and Profitability?”, examines the effect of the Minimum Capital Requirements (MCR) on banks' competition and profitability. The theoretical model shows that, in competitive market, banks trade off the costs and benefits of capital to maximize their profits. The MCR are thus likely to be an important factor on the bank's optimal choice and the target ratios increase with the MCR and decrease with banks' size. This paper also adopts the Industrial Organization (IO) approach to analyze the competitive effects of MCR on the oligopolistic market. Banks may collude to hold even higher capital ratios in the oligopolistic market since the capacity constraints caused by MCR reduce the competition. Using a sample of US banks from 2002 to 2015, the empirical works reveals that the relation between capital and profitability is nonlinear; it is depicted an inverted U shape.

The third chapter, “The Effects of Capital Constraints on the Transmission of Monetary Policy: Fama-MacBeth Test”, analyzes the effects of bank capital constraint on the monetary transmission mechanism. The model demonstrates that the monetary transmission is stronger (loan supplies are more sensitive to changes in the monetary policy) if banks are well capitalized. The empirical Fama-MacBeth 2-step test reaffirms that (1) changes in monetary policy matter more for the lending of those banks with higher capital ratios; (2) The capital constraints are intensified during the period of tight money. Both effects are largely attributable to the smaller banks.