Microeconomics of Banking

Microeconomics of Banking

eBook - 1997
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MIT Press
Over the last thirty years, a new paradigm in banking theory has overturned economists' traditional vision of the banking sector. The asymmetric information model, extremely powerful in many areas of economic theory, has proven useful in banking theory both for explaining the role of banks in the economy and for pointing out structural weaknesses in the banking sector that may justify government intervention. In the past, banking courses in most doctoral programs in economics, business, or finance focused either on management or monetary issues and their macroeconomic consequences; a microeconomic theory of banking did not exist because the Arrow-Debreu general equilibrium model of complete contingent markets (the standard reference at the time) was unable to explain the role of banks in the economy. This text provides students with a guide to the microeconomic theory of banking that has emerged since then, examining the main issues and offering the necessary tools for understanding how they have been modeled. This second edition covers the recent dramatic developments in academic research on the microeconomics of banking, with a focus on four important topics: the theory of two-sided markets and its implications for the payment card industry; "non-price competition" and its effect on the competition-stability tradeoff and the entry of new banks; the transmission of monetary policy and the effect on the functioning of the credit market of capital requirements for banks; and the theoretical foundations of banking regulation, which have been clarified, although recent developments in risk modeling have not yet led to a significant parallel development of economic modeling.Xavier Freixas is Dean of the Undergraduate School of Economics and Business Administration and Professor at the Universitat Pompeu Fabra, Barcelona. Jean-Charles Rochet is Professor of Mathematics and Economics at the University of Toulouse School of Economics.

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.



Publisher: Cambridge, Mass. : MIT Press, 1997
ISBN: 9780585133706
0585133700
0262061937
Characteristics: 1 online resource (xx, 312 p.) : ill

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