Three Essays in Banking Sector

Abstract

In the first essay, we study whether uninsured depositors respond to banks’ exposure to interest rate risk. We find that uninsured depositors are insensitive to banks’ long-term interest rate risk but both uninsured and insured depositors are attracted to banks with greater short-term interest rate risk. Furthermore, uninsured depositors’ response vary based on banks’ fragility, management discretion, and information opacity. Additionally, uninsured depositors exhibit more sensitivity to banks’ long-term interest rate risk after the 2023 banking crisis. We suggest that mandatory and comprehensive disclosure of banks’ long-term and short-term interest rate risk may be beneficial to depositors, and that regulation of banks' deposit structure and mix of investments may help stabilize the industry. In the second essay, we examine whether and how the adoption of current expected credit losses (CECL) model impacts the banks’ discretionary loan loss provision (DLLP) and loan loss provision (LLP) timeliness. We find that there is no pronounced change in DLLP for small public and private banks, and these banks do not experience significant improvement in LLP timeliness. Specifically, banks’ improved LLP timeliness documented in prior studies is attributed to the improvement in public banks over private banks. This study documents that under CECL, DLLP is no longer an appropriate proxy to assess bank opacity and the effectiveness of CECL adoption in improving LLP timeliness depends on bank characteristics. In the third essay, we investigate the association between a bank's nonperforming loans and its ESG performance. We find that a bank's ESG rating is negatively associated with its nonperforming loans. Furthermore, a bank's high performance in all three pillars of ESG evaluation reduces its ratio of nonperforming loans. Our study finds that a bank's favorable ESG performance improves its loan quality and provides archival evidence of the importance of all three pillars of ESG.