O'Reilly logo

Modern Financial Systems: Theory and Applications by EDWIN H. NEAVE

Stay ahead with the world's most comprehensive technology and business learning platform.

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, tutorials, and more.

Start Free Trial

No credit card required

CHAPTER 19
Banking Market Structure Models and Empirical Research
This chapter first examines how market conditions influence financial intermediaries’ interest rates, whether charged on loans or paid on deposits. These topics are part of a larger question: how a financial intermediary’s profitability is affected by its economic environment. Early banking theory explained that the size of the banking system was determined mechanically as a fixed multiple of available cash reserves. This original explanation was enriched substantially when Gurley and Shaw (1960) and Tobin (1956) emphasized that financial institutions’ portfolios are determined by profitability considerations. Following the lead of Gurley-Shaw and of Tobin, the theory presented in this chapter argues that financial intermediaries of most types—banks, insurance companies, mutual funds, and other financial services providers—manage their operations in attempts to maximize profitability.349 After examining some equilibrium models of banking markets, the chapter considers recent empirical studies and their relations to existing theory.
While the analytical and empirical issues considered in this chapter are variations on the theme of profit maximization, their details vary according to the type of intermediary. In the case of a bank, one principal question is whether the bank can increase its profitability by raising additional funds and relending them. In the case of an insurance company that seeks to expand its insurance ...

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, interactive tutorials, and more.

Start Free Trial

No credit card required