Commercial banks create money through lending and this newly created money fuels spending in the economy which results in its expansion. Banking system and its lending behaviour are, therefore, significant elements of economic system. The financial crisis of 2008 endorsed the need for critical examination of commercial banks’ lending and borrowing techniques such as repos and securitisation offered by the shadow banking system. The thesis examines the influences of securitisation activities of banks on their lending behaviour. Following the introductory chapter, the thesis comprises four essays.
The opening essay presents the conceptual foundations of theory of endogenous money, followed by the three empirical studies that expand the current literature on securitisation and bank lending.
The first essay outlines the key features of bank’s money creation process, setting the tone for the remaining three essays. The second essay presents analysis of key shadow banking instrument, the securitisation activities of commercial banks, to evaluate activity of money creation by commercial banks. Results of empirical analysis carried out using Bayesian Vector Autoregressive (BVAR) approach, applied to the US data, suggest effects of securitisation on bank’s funding by offering an additional source of reserves thereby reducing the volume of bank borrowing from the Fed.
Third essay analyses influence of banks’ asset composition in driving the aggregate securitisation activity. Using liquidity preference in the context of a theory of portfolio choices (Carvalho, 1999), we study if changes in banks’ highly liquid assets, is associated with aggregate securitisation issuance . An empirical assessment carried out using Structural Vector Autoregressive (VAR) approach, with the U.S. dataset, show evidence that an increase in banks’ safe assets holdings results in a higher securitisation activity. Whereas increase in other securities, which are lower in terms of degree of liquidity, has a negligible effect. These findings endorse Minsky’s (1986) notion of ‘Financial Instability Hypothesis (FIH)’, claiming that stability leads to instability.
The fourth essay presents an empirical analysis of the relationship between the nonperforming loans and the securitisation activities of banks, also distinguishing between the secured and unsecured lending. Secondly, it suggests categorisation of overall lending activity into primary and non-primary lending, by analysing the characteristics of money creation function of banks in the light of endogenous money theoretical framework. The study argues that while bank lending creates new money in the economy, not all lending results in creation of new money.
The overall findings add to the existing knowledge base by expanding understanding of the lending activity and commercial bank behaviour in the presence of opportunities for banks to securitise their loan portfolios. Thesis suggests that the dynamic notions of endogenous money and liquidity preference can be expanded to analyse implications of innovative techniques, such as securitisation activities on the behaviour of commercial banks as well as their influences on bank’s balance sheet management. Using the theoretical lens of endogenous money the thesis also offers a novel approach by further classifying lending activities into primary and non-primary lending.
