Essays on financial institutions

Cesar Orosco, University of Pennsylvania


The first chapter develops a Random Utility Model for Deposits in the US Banking Industry assessing its particular characteristics, such as a large number of participants, a large number of markets and an unbalanced panel (many banks participate in only one market and no bank participates in all markets). We modify the standard models to incorporate the fact that deposit balances are different among consumers, in a relationship proportional to their wealth. Using a unique dataset, we estimate the model and find that characteristics other than the interest rate, such as branch density, state presence, etc. add utility to the consumer. The model is also helpful in offering a more realistic set of elasticities among the many banks present in the sample. It shows how market shares will respond depending on the market demographics and current choice set (i.e. offerings of other banks). The second chapter uses the results of the model to analyze changes in welfare during the 1994-2002 period. By applying a slightly modified version of Small & Rosen's equivalent variations, we find that the consolidation process of the late 90s was welfare enhancing, particularly for the middle-income consumer. The chapter also discusses the usefulness of the model in assessing mergers and acquisitions. In general, the predictive capabilities of the model are not superior to the current market share addition method applied by the DOJ, but they are helpful in the sense that they uncover some dynamics that are important when assessing potential welfare and competition effects. Finally, Chapter 3 analyzes how banks manage exchange rate volatility when operating in a dual-currency environment. From a portfolio perspective and using simple mean variance analysis and conjectural variations, we show that banks react to higher uncertainty on the level of depreciation by reducing their exposure to exchange rate volatility. This will probably imply a reduction of the portfolio currency mismatch, unless the sensitivity of dollar denominated NPLs to the exchange rate as well as the level of dollar loans in the portfolio are high enough.

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Recommended Citation

Orosco, Cesar, "Essays on financial institutions" (2005). Dissertations available from ProQuest. AAI3197724.