Microbanking

Author: (USA) Fuxue Luo / Liu Liang
Publisher:
Publish Date: 2000-01-01
Features: [Editor's Recommendation]
ANTHONY M. SANTOMERO, RICHARD K. MELLON, Professors of Finance, Wharton School, University of Pennsylvania
Twenty years ago, banking courses either focused on bank management issues or on the monetary level, with no connection between the two. Since then, academia has gradually developed a microeconomic theory of banking, shifting the focus from bank risk models to asymmetric information models. The asymmetric information model assumes that different agents possess varying amounts of information about relevant economic variables, and agents may exploit their informational advantage for private gain. The asymmetric information model can not only explain the role of banking in the economy but also illustrate structural defects in the banking sector, such as runs and panics, persistent credit rationing, payment difficulties, and the rationale for government intervention. Microbanking is a guide to this new theoretical field, primarily covering: the reasons for the existence of financial intermediaries, the application of industrial organization theory in banking, optimal contracts between borrowers and lenders, equilibrium in credit markets, macroeconomic effects of financial frictions, the bankruptcy of individual banks and systemic risk, bank risk internal control, and bank regulation. Each chapter concludes with a set of questions and answers.