| The first chapter develops a model that analyzes the implications of a separated banking system for the firms' optimal funding decision. The model sheds light on the equilibrium effort level under alternative lenders conditional on the firms' quality. Commercial banking financing yields higher effort than equity financing, thus higher expected payoff. The model shows that firms with severe moral hazard finance with loans, while firms where moral hazard is less severe finance in the capital market. Finally, the model suggests the possibility of rationing in both markets when quality is relatively low.; The second chapter develops a model that analyzes the optimal portfolio allocation in the presence of asymmetric information and frictions on the liability side of the balance sheet. The model predicts bank runs when equity returns are low and shows that the presence of illiquid assets may prevent them. In addition, the model suggests a positive correlation between quality and liquidity, and sheds light on balance sheet responses in the presence of unexpected shocks to the economy. In response to a negative quality shock, banks decrease liquidity through a contraction in securities, loans and external finance. A decline in depositors decreases liquid assets, but increases loans and external finance, thus reducing liquidity and making the bank more vulnerable to runs. Finally, in response to a low return shock, banks increase liquidity and return, with securities and loans, financed with external resources.; The third chapter uses individual bank level data to investigate the responses of Mexican banks to unexpected monetary and balance sheet shocks from 1988 to 1999. The analysis investigates a possible change in banks' behavior after the peso crisis in 1994. It focuses on monetary policy ability to influence commercial banks portfolio allocation by reducing the supply of loans. With the application of vector autoregression techniques, I find evidence that monetary policy is able to affect the balance sheet composition for Mexican banks, suggesting the presence of an operative lending channel. Last, evidence shows that a negative shock to liquid assets reduces credit and external finance which may disrupt economic activity. |
