Essays on Financial Markets and Institutions

Abstract

This dissertation consists of three essays that focus on financial markets and institutions. Chapter 1 examines whether branches of banks in communities affected by natural disasters raise deposit rates to attract additional deposits in response to any deposit withdrawals and to meet any increase in loan demand for the rebuilding that takes place. Studies of the responses of banks to natural disasters increasingly find it useful to rely on a difference-in-differences identification strategy. Importantly, as our empirical results indicate, the discretion that a researcher uses in terms of the choices made at different stages produces different conclusions about the impact of natural disasters on bank deposit rates. If we do not match branches affected by natural disasters with those in adjacent communities not affected the results indicate that natural disasters have a statistically negative effect on deposit rates without matching and with a low degree of matching. However, when we use a medium or a high degree of matching, there is no statistically significant effect. Moreover, when we use two different matching methods, the results differ. In the case of propensity score matching, we find a statistically significant effect but no effect in the case of coarsened exact matching. Chapter 2 investigates the response of banks/branches and their depositors to natural disasters based on a difference-in-difference-in-differences analysis and using a coarsened exact matching approach. Based on 1.3 million observations from 1999 to 2017, we find a statistically positive and significant impact of natural disasters on deposit rates, measured by property damages, but no effect on deposits. In this study, we argue that our research design and interpretation of the empirical results in terms of customer supply and bank demand responses enables one to determine new and more informative causal relationships. Chapter 3 explores how the Opportunity Zone (OZ) tax incentive and banks contribute to and promote investment and economic growth in low-to-moderate-income communities. The Opportunity Zone (OZ) tax incentive, introduced under the Tax Cuts and Jobs Act in 2017, provides tax benefits to investors who invest in designated Opportunity Zones aiming to promote investment in low-to-moderate-income communities. We find that, after the OZ designation, the total amount and number of small business loan originations for the size category between $250,000 and $1,000,000 have increased within the OZ-designated tract. Subsequently, bank branches within the OZ-designated tract and its low-income neighboring tract(s) experience an increase in deposits. In addition, the findings suggest that the total value and number of loan originations and deposits increase within the communities when a community bank operates in the area following the designation. Overall, the relationship between a bank and the OZ tax incentive is crucial in promoting investment and economic growth in low-to-moderate-income communities.