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Abstract
In the wake of the COVID-19 pandemic, as fears subside and the economy braces for a potential recession, the Federal Reserve Board is focused on controlling inflationary pressures to mitigate economic downturn risks. This dissertation investigates the challenges and implications posed by the pandemic and the Federal Reserve's monetary policies on the banking industry, with a focus on agricultural and non-agricultural banks. The research comprises three closely related chapters. The first chapter employs a systematic dynamic panel data (DPD) analysis using the generalized method of moments (GMM) to analyze banks’ risk-taking behaviors during the COVID-19 pandemic, factoring in the monetary policy adjustments made by federal authorities. This chapter details how the Federal Reserve's aggressive expansionary monetary policies helped banks address liquidity issues, although these measures also heightened asset risk profiles. The findings underscore the dual impact of uncontrolled economic shocks and discretionary portfolio decisions on banks' risk profiles. The pandemic's pervasive economic shocks compromised historical lending decisions, while expansionary policies provided relief but increased asset risk exposure. Small, specialized banks, particularly those focused on agricultural lending, were found to be more vulnerable due to their higher-risk asset portfolios and limited access to less volatile financial instruments. The second chapter's insights, derived from a generalized difference-in-differences model, reveal variations in risk-taking behaviors across different banking groups, aiding policymakers in formulating targeted monetary policies and macroprudential regulations. The study shows that banks' risk-taking increased following the implementation of expansionary policies, with profitability ratios influencing their risk levels. Larger banks and those in concentrated markets managed risks better due to diversified portfolios and stronger capital bases. The third chapter synthesizes findings from Seemingly Unrelated Regression (SUR) analyses, illustrating the resilience and adaptability of commercial banks across two significant economic downturns. Particularly, agricultural banks demonstrated stability in profit margins, suggesting sector-specific strategies for growth. The analysis highlights the importance of sector-specific factors and external economic pressures in shaping banking strategies and risk management.