Three Essays on Bank Capital Allocation Impacts on Economic Growth & Sustainability, Bank Performance, Efficiency & Financial System Resilience

This thesis presents a comprehensive study on the impacts of bank capital allocation practices on broader economic growth and sustainability with secondary effects on financial system performance. In completing the study, in Chapter 1 we begin by extending Schumpeter’s theory (1934; 1939) on financial intermediation to account for the effects of capital allocation practices at banks. We uniquely demonstrate, in quasi-experimental settings through a bank-economy Agent-Based Model, that use of more comprehensive capital allocation practices at banks promotes more efficient credit allocations. Significantly, the gains in efficiencies result in positive real effects on industrial economic growth and loan performance, as well as financial system profitability and capital adequacy. In seeking to confirm Schumpeter’s extended theory in real-world settings, in Chapter 2 we develop a novel lexical frontier analysis approach for measuring ex-ante banks’ efficiency by assessing capital allocation capabilities. Comparing results from the novel approach to existing techniques, we demonstrate a link between the quality of capital allocation practices and bank production and economic (profit) efficiencies. In Chapter 3, we calculate US banks’ profit efficiencies, as ex-post proxy for capital allocation efficiency, and demonstrate that US banks utilizing robust capital allocation practices that are economically efficient, promote growth of ESG sustainable industries while moderating growth of sectors with lower prospects. The collection of findings demonstrate that application of robust capital allocation practices by banks can be a major accelerator of the Schumpeterian credit intermediation channel for industrial growth, with significant positive effects on bank efficiency, capital adequacy, resiliency, and financial system stability.