Innovations in Money and Banking Markets

Abstract

The U.S. banking industry has experienced several technological and banking regulatory changes in the past two decades. This dissertation is composed of three papers that review and investigate how these banking and technological innovations have impacted depositors, bank provision of monetary assets, and bank performance. The order in which the papers are presented follows the order in which they were produced as the production of one paper helped spark ideas that led to the next. Motivated by the fact that money has become more heterogeneous in terms of its returns, Chapter 1 focus on innovations in money markets by focusing on monetary assets that are used for payment of daily transaction in an economy, also called transaction balances. This chapter surveys and critically evaluates the historical regulatory, financial, and technological innovations that have occurred since the 1970s that have caused the definition of U.S. transaction balances to be a dynamic rather than a static process. The review concludes by analyzing the potential challenges this research field faces ahead, with the main topic being the social welfare consequences of the developments of the current payment system in the United States. Given the different types of deposit accounts banks can offer highlighted in the first chapter, this raises the question: do banks operating in different regions offer different deposit accounts? Chapter 2 explores this by examining differences in the composition and behavior of West Virginia banks. The focus on WV is motivated by the relatively weak economic growth the state has experienced. Many factors potentially contribute to this fact, but little research has examined the role of financial services. This paper uses micro banking data to document how WV banks differ from their U.S. counterparts and assess whether differences can be explained by the composition of banks in the state. Despite experiencing faster banking consolidation, West Virginia still has more and smaller banks that are less efficient and profitable. WV banks also have customers that favor lower-risk, lower-return deposits, and managers who rely heavily on lower-risk, lower-return real estate loans (mostly 1-4 unit residential). Other states have banks with considerable heterogeneity in real estate loan shares, but most of these financial outcomes are not explained well by observable bank and regional characteristics. Other factors are needed to explain financial heterogeneity of banks across states; unusually high risk aversion may explain the economically distinct banking strategies and low returns of WV banks. Motivated