Essays on bank efficiency and shadow banking

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Saito, Richard
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Shadow banking refers to credit intermediation activities carried out by non-bank financial institutions. One of the main functions of the shadow banking system is to allow depositary institutions to use securitization instruments to expand their funding sources, limit their exposure to credit risk, and deal with capital requirements. In this sense, by enabling structured finance vehicles, non-bank financial intermediation can be a shock absorption mechanism for risks that develop within the commercial banking system. This thesis aims to understand non-bank financial intermediation in Brazil from three perspectives. We begin by analyzing the macroeconomic trends in shadow banking activities in the Brazilian economy from 2002 to 2020, focusing on structured finance vehicles. We show that the Brazilian shadow banking system complements the banking sector and that the use of structured finance vehicles as a source of external financing in Brazil exhibits a constant increase. Second, we explore the supply side of securitization and analyze the association between the decision to securitize originated loans and bank efficiency using a two-step approach that combines data envelopment analysis and TOBIT panel data regressions. Using data on 53 Brazilian financial conglomerates from June 2001 to December 2012, our findings demonstrate that income from securitization transactions is positively associated with the efficiency in generating interest income but not associated with operational efficiency. Finally, we explore the demand side of securitization and investigate the association between risk retention by originators (the acquisition of first-loss tranches by originators, also known as skin in the game) and the performance of receivables funds. We use data on 85 Brazilian receivable funds with a single originator from January 2013 to December 2020 and find that skin in the game is a buffer against observable risks, in accordance with the buffer hypothesis. Our findings also indicate that the reputation of originators that are financial institutions (measured by delinquency ratios) in the loan market can alleviate moral hazard concerns. However, the opposite holds for funds with fintech originators: risk retention is a signal against the unobservable quality of receivables. Altogether, our findings suggest that the reputation of financial institutions is an essential component to understand the performance of structured finance vehicles and that securitization is a stabilizing mechanism for the financial system in emerging markets because it allows efficient risk transfer to outside investors.

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