Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
Financial Intermediation
2013-2014
Contents
2
A. Learning Objectives
B. Introduction to Financial Intermediation
Functions
of FIs
C. Transaction costs
Financing
sources
D. Information asymmetry
FINANCIAL INTERMEDIATION
D1.
THEORIES OF FINANCIAL
INTERMEDIATION
D2.
Contents
3
A. Learning Outcomes
4
E. Liquidity insurance
F. Other Specialness
G. Past Year Exam Questions
H. Essential Readings
costs,
insurance,
information asymmetry, and
financing sources for borrowers.
liquidity
A. Questions
5
Surplus units
Deficit units
Why
do we need banks?
is the role of FIs in the overall allocation
of capital?
Why do various FIs receive special regulatory
attention?
Why do governments bail out FIs?
What
Lillibeth Ortiz
Exercise:
B. Exercise: What are the requirements
think-pairof a typical saver & borrower?
share
Savers
Requirements
2013-2014
B. Without FIs
8
Borrowers
Requirements
Size
Maturity
Liquidity
Households
Corporations
(net savers)
(net borrowers)
Cash
Risk
B. With FIs
10
Information
Substantial
Large
Households
/ monitoring costs
Cash
price risk
Deposits/Insurance
Policies
denominations
(Brokers)
FI
(Asset
Transformers)
Corporations
Equity & Debt
(Primary securities)
Cash
(Secondary securities)
Diagram from: Saunders & Cornett, Financial Institutions Management
1.
Brokerage function
FIs
transaction services
Do
Lillibeth Ortiz
2013-2014
2.
Accepts
FIs
E.g.,
Buys
Questions
15
banks
E.g.,
Issue
Savers
Assets Liabilities
Bank
Assets Liabilities
Borrowers
Assets Liabilities
Fixed sum
Short term
Lillibeth Ortiz
2013-2014
B. True or False?
20
Asset diversification
2.
Asset evaluation
Review Questions
21
Review Questions
22
1.
2.
3.
4.
5.
Review Questions
23
Brokerage
Asset transformation
Savings provider
All of the above.
Only 1 and 2 above.
C. Transaction costs
C1. Financing sources
D. Information asymmetry
D1. Information sharing coalitions
D2. Delegated monitor
D3. Mechanism for commitment
E. Liquidity Insurance
Lillibeth Ortiz
2013-2014
Exercise:
C. Transaction Costs
25
26
C. Transaction Costs
C. Illustration
27
28
Return to savers
Cost to Borrower
R TS
R + TB
where
R = interest rate
TS = cost incurred
where
R = interest rate
TB = cost incurred
Option 1
Each saver earns 6% (R) on investment but
incurs transaction cost of $1,000 (TS = 2%)
Net
Borrower
Total
Lillibeth Ortiz
return = R TS =
borrowing cost = R + TB =
transaction costs = TB + TS =
2013-2014
Exercise:
32
Return to savers
Cost to Borrower
RS = R TS 1
RB = R + TB1 + C
Option 2:
Saver
return =
Bank
Where:
C Charge raised by intermediary (banks transaction costs
borne by borrower)
T1
indicates the respective borrowers & savers costs after
the introduction of the bank
Spread = RB RS =
TB1
Net
Total
+ TS + C
1
C. Transaction Costs
33
borrowing cost =
Exercise Questions
34
>
TB1 + TS1 + C
C. Transaction Costs
35
Exercise:
think-pairshare
C. Questions
36
Lillibeth Ortiz
2013-2014
C1. Illustration
38
Capital
Capital markets
Many
Since
Research
42
Borrowers
Characteristics
Management
Skills
Future profits
Credit risk
Credit
reputation
Venture
Capital
Not
established
Not
established
Not
established
Not
established
Financing Source
Bank
Capital Market
Well
established
Poor prospects
High
Not
established
Well
established
Good
prospects
Low
Established
Lillibeth Ortiz
2013-2014
True or False?
43
Review Question
44
C. Questions
45
Its ideas
Its credit history
Its investment opportunities
All of the above
Only 2 of the above
C. Transaction costs
C1. Financing sources
D. Information asymmetry
D1. Information sharing coalitions
D2. Delegated monitor
D3. Mechanism for commitment
E. Liquidity Insurance
D. Information Asymmetry
47
48
1.
2.
3.
4.
5.
Lillibeth Ortiz
Information
Asymmetry
Adverse
Selection
a.
b.
Moral
Hazard
c.
Free Rider
Problem
d.
Agency
Costs
e.
2013-2014
1.
2.
3.
4.
5.
D. Information Asymmetry
50
Information
Asymmetry
Adverse
Selection
a.
b.
Moral
Hazard
c.
Free Rider
Problem
d.
Agency
Costs
e.
D. Information Asymmetry
51
Question
52
Hazard
Selection
Adverse
D. Information Asymmetry
53
2.
3.
Lillibeth Ortiz
2013-2014
Questions
55
Original
Questions
57
Information
D2. Questions
59
1.
Invest directly
A.
B.
2.
Monitor directly
Do not monitor
Transact with
bank
Delegate
monitoring to a
bank
Lillibeth Ortiz
10
2013-2014
Lender 2
Lender
Lender 1
Lender m
Borrower
Question
63
Saver
2
Saver
1
Saver
m
BANK
Borrower
Lillibeth Ortiz
11
2013-2014
Questions
68
variance of returns
D. Questions
69
K + D min [S, m x K]
where
K is the cost of monitoring
D is the delegation cost per borrower
S is the contracting cost without monitoring
m x K is the cost of direct monitoring by m lenders
R
R
Questions
71
It
Lillibeth Ortiz
12
2013-2014
Have
Main
D. True or False?
75
D. Review Question
76
a)
b)
c)
d)
e)
D. Review Question
77
D. Review Question
78
Lillibeth Ortiz
13
2013-2014
E. Illustration
E. Questions
79
80
Savers
E. Savers Options
81
Borrowers
E. Banks Solution
82
Sell
can
E. Bank Solution
83
E. Bank Solution
84
Lillibeth Ortiz
14
2013-2014
E. Illustration
85
E. Liquidity Insurance
86
E. Questions
87
E. True or False?
88
Maturity Transformation
90
Maturity intermediation
Transmission of monetary policy.
Credit allocation (Areas of special need
such as home mortgages).
Intergenerational transfers or time
intermediation.
Payment services
Denomination intermediation.
Lillibeth Ortiz
15
2013-2014
Recap
Recap: theories
91
92
Low
transformation
Research
93
Review Question
94
Review Question
95
Lillibeth Ortiz
16
2013-2014
G. Group Discussion
98
G. Group Work:
Exam Solution Outline
99
H.
Essential Reading
100
Introduction
Main Body
Conclusion
Sources:
Books
Matthews & Thompson, The Economics of Banking
(2008). Chapter 3.
Saunders & Cornett Financial Institutions Management
(2008). Chapter 1, pp.210,1521.
Journal articles
Bhattacharya, S. and A.V. Thakor Contemporary
banking theory, Journal of Financial Intermediation,
3(1) 1993, pp. 250; Sections 1, 2, and 7.
Diamond, D.W. Financial intermediation as
delegated monitoring: A simple example, Federal
Reserve Bank of Richmond Economic Quarterly, 82(3)
1996, pp.5166.
Next Week:
101
Lillibeth Ortiz
17