Banking and optimal design

This dissertation examines how banks and nonbanks behave during credit cycles and analyzes optimal design in financial markets and other contexts. In the first chapter, I analyze the credit cyclicality of nonbanks. Little is known about non-depository institutions' direct lending behavior, especially to small businesses. Using a novel longitudinal dataset of business loans originated by banks and nonbanks, I provide new evidence that nonbanks are cyclical lenders in the business loan market. Overall, my analysis demonstrates the volatility of the non-bank lending model in the face of crises. In the second chapter, we study the role of regulatory mandates, or investment restrictions, in shaping the distribution of risk-taking and market power among large non-bank financial institutions. Institutions trade to hedge risks, but market concentration leads to constrained-inefficient risk sharing even when all institutions can access complete financial markets. Imposing mandates on a subset of investors redistributes market power and can further hamper risk sharing. Optimal market-wide mandates, in contrast, can improve risk sharing and welfare through general equilibrium forces, and we characterize their properties. Our findings suggest that broad coverage is critical for implementing effective portfolio constraints on non-bank financial institutions. In the third chapter, two privately-informed agents must take joint action without resorting to side payments. The size and location of the support of each agent's private types (their preferred action) determine the degree of conflict. Under high conflict, it is too costly to elicit agents' information, which leads to an optimal constant allocation. Delegation arises endogenously when there is conflict and asymmetry in the amount of private information. The agent with more private information dictates the allocation within some bounds. When supports overlap, information is shared, and sometimes ex-post inefficient actions are optimally taken. Welfare relative to the first-best is non-monotone in conflict.