Essays on Financial Stability

Financial stability relies on the cooperation of many departments. It could include house-
hold financial resilience, financial system security and macroeconomic stability. Financial
system stability is significant, given that a stable system could efficiently allocate resources
and assess financial risk. Thus, it is vital to figure out how to maintain financial stability.
This thesis examines the influencing factors on financial stability by using global data,
especially U.S. data. The first essay empirically analyses the effect of financial inclusion
constructed by principle component analysis (PCA) on financial stability. Using data
from 93 countries from 2004 to 2018, our results conclude that the impact of financial
inclusion on financial stability is ambiguous due to the different indicators of financial
stability. Additionally, we also find that the results vary in different groups of countries
based on income level.
The second essay highlights that expansionary government spending could increase bank
liquidity creation by using U.S. data. This effect holds under the World Uncertainty.
Additionally, we point out that partisan effect, political election cycle and geopolitical
risk do not have effect on this relationship.
The third essay investigates how the growth of bank liquidity creation affects systemic
risk constructed by conditional value-at-risk (CoVaR). By using the large U.S. bank data,
we conclude that bank liquidity creation increases systemic risk. Also, we find that the
connection among large banks could reduce the risks raised by bank liquidity creation.
Overall, this thesis provides further implications for authorities to provide regulations
to maintain financial stability. It highlights that policies to promote financial inclusion
should be different based on the income level of countries. Moreover, regulators should
focus more on the quality of financial inclusion. Also, it suggests that expansionary fiscal
policy could be a useful tool to release the credit market. Finally, our thesis indicates
micro- and macro-prudential regulations should be taken to avoid the risk raised by bank
liquidity creation. Additionally, the authorities need to reconsider the optimal size of
financial institutions and financial systems.