| This dissertation consists of two essays on the theory of financial intermediation with some clear thematic links.; The first essay examines bank capital structure in a regulated environment. Our model addresses the simultaneity of bank operating and financing decisions, as well as incorporates several U.S. banking regulations, and considers their combined effects on bank leverage. The essay thus provides a broader treatment of the banking capital structure issue than hitherto provided.; The model draws together reserve requirements, discount window lending, FDIC deposit insurance as well as taxation. An option-pricing framework is used to evaluate the claims of the various interest groups viz. stockholders, depositors, subordinate bondholders, the Fed, the FDIC and the tax authority, on the bank's assets at maturity. The model admits a wide range of optimal capital structures, and provides a rationale for the existence of depository institutions.; In our second essay we analyze dynamic liquidity management by a bank, in the presence of transaction costs and Federal funds markets. Recent research of the Fed funds market have documented a tendency of large (small) banks to be net purchasers (sellers) of Fed funds. Heterogeneous arguments based of risk-aversion, monopoly power, or information asymmetry, have been suggested to explain this phenomena.; Applying results from the theory of "instantaneous" control of Brownian motion, our model corroborates in an integrated dynamic inventory-control framework, the diverse theoretical explanations of Fed funds purchase behavior. It also provides a new explanation of bank-specific Fed funds purchase behavior and highlights factors that affect bank Fed funds strategy. Finally, the model has monetary policy implications. |
