Microeconomics of Banking / Edition 1

Microeconomics of Banking / Edition 1

by Xavier Freixas, Jean-Charles Rochet
     
 

ISBN-10: 0262061937

ISBN-13: 9780262061933

Pub. Date: 10/17/1997

Publisher: MIT Press


"The authors have provided an extremely thorough and up-to-date survey of microeconomic theories of financial intermediation. This work manages to be both rigorous and pleasant to read. Such a book was long overdue and should be required reading for anybody interested in the economics of banking and finance."
-- Mathias Dewatripont

Overview


"The authors have provided an extremely thorough and up-to-date survey of microeconomic theories of financial intermediation. This work manages to be both rigorous and pleasant to read. Such a book was long overdue and should be required reading for anybody interested in the economics of banking and finance."
-- Mathias Dewatripont, Professor of Economics, ECARE, Université Libre de Bruxelles
Twenty years ago, most banking courses focused on either management or monetary aspects of banking, with no connecting. Since then, a microeconomic theory of banking has developed, mainly through a switch of emphasis from the modeling of risk to the modeling of imperfect information. This asymmetric information model is based on the assumption that different economic agents possess different pieces of information on relevant economic variables, and that they will use the information for their own profit. The model has been extremely useful in explaining the role of banks in the economy. It has also been useful in pointing out structural weaknesses of the banking sector that may justify government intervention--for example, exposure to runs and panics, the persistence of rationing in the credit market, and solvency problems.

Microeconomics of Banking provides a guide to the new theory. Topics include why financial intermediaries exist, the industrial organization approach to banking, optimal contracting between lenders and borrowers, the equilibrium of the credit market, macroeconomic consequences of financial imperfections, individual bank runs and systemic risk, risk management inside the banking firm, and bank regulation. Each chapter ends with a detailed problem set and solutions.


Product Details

ISBN-13:
9780262061933
Publisher:
MIT Press
Publication date:
10/17/1997
Edition description:
Older Edition
Pages:
334
Product dimensions:
7.26(w) x 10.28(h) x 0.85(d)

Table of Contents

Figures
Preface
1 General Introduction
1.1 What Is a Bank, and What Do Banks Do?
1.1.1 Liquidity and Payment Services
1.1.2 Asset Transformation
1.1.3 Managing Risk
1.1.4 Monitoring and Information Processing
1.1.5 The Role of Banks in the Resource Allocation Process
1.2 Banking in General Equilibrium Theory
1.2.1 The Consumer
1.2.2 The Firm
1.2.3 The Bank
1.2.4 General Equilibrium
Notes
References
2 Why Do Financial Intermediaries EXist?
2.1 Transaction Costs
2.1.1 Economies of Scope
2.1.2 Economies of Scale
2.2 Liquidity Insurance
2.2.1 The Model
2.2.2 Autarky
2.2.3 Market Economy
2.2.4 Optimal Allocation
2.2.5 Financial Intermediation
2.3 Information Sharing Coalitions
2.3.1 A Basic Model of Capital Markets with Adverse Selection
2.3.2 Signaling Through SelfFinancing
2.3.3 Coalitions of Borrowers
2.3.4 Related Justifications of FIs with Asymmetric Information
2.4 Financial Intermediation as Delegated Monitoring
2.5 CoeXistence of Direct and Intermediated Lending
2.5.1 A Simple Model of the Credit Market with Moral Hazard
2.5.2 Monitoring and Reputation (adapted from Diamond, 1991)
2.5.3 Monitoring and Capital (adapted from Holmström and
Tirole, 1993)
2.5.4 Related Contributions
2.6 Problems
2.6.1 Economies of Scale in Information Production
2.6.2 Monitoring as a Public Good and Gresham's Law
2.6.3 Intermediation and Search Costs (adapted from Gehrig, 1993)
2.7 Solutions
2.7.1 Economies of Scale in Information Production
2.7.2 Monitoring as a Public Good and Gresham's Law
2.7.3 Intermediation and Search Costs
Notes
References
3 The IndustrialOrganization Approach to
Banking
3.1 A Model of Perfect Competition in the Banking Sector
3.1.1 The Model
3.1.2 The Standard Approach: The Credit Multiplier
3.1.3 The Behavior of Individual Banks in a Competitive Banking Sector
3.1.4 The Competitive Equilibrium of the Banking Sector
3.2 The MontiKlein Model of a Monopolistic Bank
3.2.1 The Original Model
3.2.2 The Oligopolistic Version
3.2.3 Empirical Evidence
3.3 Analyzing the Impact of Deposit Rate Regulation
3.4 Double Bertrand Competition
3.5 Monopolistic Competition
3.5.1 Does Free Competition Lead to the Optimal Number of Banks?
3.5.2 The Impact of Deposit Rate Regulation on Credit Rates
3.5.3 Bank Network Compatibility
3.6 Branch versus Unitary Banking
3.7 AppendiX 1: Empirical Evidence
3.8 AppendiX 2: Measuring the Activity of Banks
3.8.1 The Production Approach
3.8.2 The Intermediation Approach
3.8.3 The Modern Approach
3.9 Problems
3.9.1 EXtension of the MontiKlein Model to the Case of Risky
Loans (adapted from Dermine, 1986)
3.9.2 Compatibility between Banking Networks (adapted from Matutes
and Padilla, 1994)
3.10 Solutions
3.10.1 EXtension of the MontiKlein Model to the Case of
Risky Loans
3.10.2 Compatibility between Banking Networks
Notes
References
4 The LenderBorrower Relationship
4.1 Why Risk Sharing Does Not EXplain All the Features of Bank
Loans
4.1.1 Optimal Contracts When Cash Flows Are Observable
4.1.2 EXtensions and Applications of the RiskSharing Paradigm
4.2 Costly State Verification
4.2.1 Incentive Compatible Contracts
4.2.2 Efficient Incentive Compatible Contracts
4.2.3 Efficient FalsificationProof Contracts
4.2.4 Dynamic Debt Contracts with Costly State Verification
4.3 Incentives to Repay
4.3.1 Threat of Termination
4.3.2 Strategic Debt Repayment: The Case of a Sovereign Debtor
4.3.3 Private Debtors and the Inalienability of Human Capital
4.4 Moral Hazard
4.5 The Incomplete Contract Approach
4.5.1 Delegated Renegotiation
4.5.2 The Efficiency of Bank Loan Covenants
4.6 Collateral and Loan Size as Devices for Screening Heterogenous
Borrowers
4.6.1 The Role of Collateral
4.6.2 Loans with Variable Size
4.7 Problems
4.7.1 Optimal Risk Sharing with Symmetric Information
4.7.2 Optimal Debt Contracts with Moral Hazard (adapted from Innes, 1987)
4.7.3 The Optimality of Stochastic Auditing Schemes
4.7.4 The Role of Hard Claims in Constraining Management (adapted
from Hart and Moore, 1995)
4.7.5 Collateral and Rationing (adapted from Besanko and Thakor, 1987)
4.7.6 Securitization (adapted from Greenbaum and Thakor, 1987)
4.8 Solutions
4.8.1 Optimal Risk Sharing with Symmetric Information
4.8.2 Optimal Debt Contracts with Moral Hazard
4.8.3 The Optimality of Stochastic Auditing Schemes
4.8.4 The Role of Hard Claims in Constraining Management
4.8.5 Collateral and Rationing
4.8.6 Securitization
Notes
References
5 Equilibrium and Rationing in the Credit
Market
5.1 Definition of Equilibrium Credit Rationing
5.2 The Backward Bending Supply of Credit
5.3 How Adverse Selection Can Lead to a Backward Bending Supply
of Credit
5.3.1 The Model of Stiglitz and Weiss (1981)
5.3.2 Risk Characteristics of Loan Applicants
5.4 Collateral as a Sorting Device
5.5 Credit Rationing Due to Moral Hazard
5.5.1 Nonobservable Technology Choice
5.5.2 Nonobservable Capacity to Repay
5.6 Problems
5.6.1 The Model of Mankiw (1986)
5.6.2 Efficient Credit Rationing (adapted from De Meza and Webb, 1992)
5.6.3 Too Much Investment (adapted from De Meza and Webb, 1987)
5.7 Solutions
5.7.1 The Model of Mankiw (1986)
5.7.2 Efficient Credit Rationing
5.7.3 Too Much Investment
Notes
References
6 The Macroeconomic Consequences of Financial
Imperfections
6.1 A Short Historical Perspective
6.2 The Transmission Channels of Monetary Policy
6.2.1 The Money Channel
6.2.2 Credit View
6.2.3 Credit View versus Money View: Relevance of the Assumptions
and Empirical Evidence
6.2.4 Endogenous Money
6.3 The Fragility of the Financial System
6.3.1 Financial Collapse Due to Adverse Selection
6.3.2 Financial Fragility and Economic Performance
6.4 Financial Cycles and Fluctuations
6.4.1 Bankruptcy Constraints
6.4.2 Credit Cycles
6.5 The Real Effects of Financial Intermediation
6.6 Financial Structure and Economic Development
Notes
References
7 Individual Bank Runs and Systemic Risk
7.1 Banking Deposits and Liquidity Insurance
7.1.1 A Model of Liquidity Insurance
7.1.2 Autarky
7.1.3 The Allocation Obtained When a Financial Market Is Opened
7.1.4 The Optimal (Symmetric) Allocation
7.2 A Fractional Reserve Banking System
7.3 The Stability of the Fractional Reserve System and Alternative
Institutional Arrangements
7.3.1 The Causes of Instability
7.3.2 A First Remedy to Instability: Narrow Banking
7.3.3 Regulatory Responses: Suspension of Convertibility or
Deposit Insurance
7.3.4 Jacklin's Proposal: Equity versus Deposits
7.4 Efficient Bank Runs
7.5 Interbank Markets and the Management of Idiosyncratic Liquidity
Shocks
7.5.1 The Model of Bhattacharya and Gale (1987)
7.5.2 The Role of the Interbank Market
7.5.3 The Case of Unobservable Liquidity Shocks
7.6 Aggregate Liquidity Shocks
7.6.1 The Model of Hellwig (1994)
7.6.2 Efficient Risk Allocation
7.6.3 Second Best Allocations under Asymmetric Information
7.7 Systemic Risk and the Lender of Last Resort: A Historical
Perspective
7.7.1 Four Views of the LLR Role
7.7.2 The Effect of LLR and Other Partial Arrangements
7.7.3 The Moral Hazard Issue
7.8 Problems
7.8.1 Different Specifications of Preferences in the
DiamondDybvig Model
7.8.2 InformationBased Bank Runs (adapted from Postlewaite and
Vives, 1987)
7.8.3 Banks' Suspension of Convertibility (adapted from Gorton,
1985)
7.9 Solutions
7.9.1 Different Specifications of Preferences in the
DiamondDybvig Model
7.9.2 InformationBased Bank Runs
7.9.3 Banks' Suspension of Convertibility
Notes
References
8 Managing Risks in the Banking Firm
8.1 Default Risks
8.1.1 Institutional ConteXt
8.1.2 Evaluating the Cost of Default Risks
8.1.3 EXtensions
8.2 Liquidity Risk
8.2.1 Reserve Management
8.2.2 Introducting Liquidity Risk in the MontiKlein Model
8.2.3 The Bank as a Market Maker
8.3 Market Risk
8.3.1 Modern Portfolio Theory: The Capital Asset Pricing Model
8.3.2 The Bank as a Portfolio Manager: The Pyle (1971) and
HartJaffee (1974) Approach
8.3.3 An Application of the Portfolio Model: The Impact of Capital
Requirements
8.4 AppendiX: Institutional Aspects of Credit Risk
8.4.1 Interest Rate and Rate of Return
8.4.2 Collateral
8.4.3 Endorsement and Insurance
8.4.4 Loan Covenants
8.4.5 Information Costs
8.4.6 Accounting
8.4.7 Bankruptcy
8.4.8 Fraud
8.5 Problems
8.5.1 The Model of Prisman, Slovin, and Sushka (1986)
8.5.2 The Risk Structure of Interest Rates (adapted from Merton, 1974)
8.5.3 Using the CAPM for Loan Pricing
8.6 Solutions
8.6.1 The Model of Prisman, Slovin, and Sushka
8.6.2 The Risk Structure of Interest Rates
8.6.3 Using the CAPM for Loan Pricing
Notes
References
9 The Regulation of Banks
9.1 Regulation Theory and Banking Theory
9.1.1 The Justification of Regulation
9.1.2 The Scope of Banking Regulation
9.1.3 Regulatory Instruments
9.2 Why Do Banks Need a Central Bank?
9.2.1 The Monopoly of Money Issuance
9.2.2 The Fragility of Banks
9.2.3 The Protection of Depositors
9.3 Portfolio Restrictions
9.4 Deposit Insurance
9.4.1 The Moral Hazard Issue
9.4.2 RiskRelated Insurance Premiums
9.4.3 Is FairlyPriced Deposit Insurance Possible?
9.4.4 The Effects of Deposit Insurance on the Banking Industry
9.5 Solvency Regulations
9.5.1 The Portfolio Approach
9.5.2 The Incentive Approach
9.5.3 The Incomplete Contract Approach
9.6 The Resolution of Bank Failures
9.6.1 Resolving Banks' Distress: Instruments and Policies
9.6.2 Who Should Decide on Banks' Closure?
9.6.3 Can Banks Be "Too Big to Fail"?
9.7 Complements
Notes
References
IndeX

Customer Reviews

Average Review:

Write a Review

and post it to your social network

     

Most Helpful Customer Reviews

See all customer reviews >