book

The Economics of Banking

by Jin Cao

November 2021

Beginner

676 pages

15h 14m

English

Routledge

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1.1 What are banks and why are they special?1.2 Structure of this book1.3 Exercises
2.1 Introduction2.2 Bank liquidity creation and bank run2.2.1 Liquidity preferences and the need for liquidity insurance2.2.2 Baseline result: the planner’s solution2.2.3 Resource allocation in a decentralized economy2.2.4 Bank run: fundamental-driven versus panic-driven2.2.5 Fragile banks and policy implications2.2.6 Equilibrium refinement and equilibrium selection2.2.7 Summary2.3 Optimal bank run2.3.1 Modelling aggregate asset return risks2.3.2 Optimal risk-sharing with zero liquidation cost2.3.3 Optimal risk-sharing with positive liquidation cost2.3.4 Summary2.4 Fragility and bank liquidity2.4.1 Model setup: the need for fragility2.4.2 Constrained efficiency2.4.3 Market liquidity and funding liquidity2.4.4 Summary2.5 Empirical evidence: drivers of bank runs and policy responses2.6 Exercises
3.1 Introduction3.2 Bank as delegated monitor3.2.1 Asymmetric information and monitoring3.2.2 Costly monitoring under direct lending3.2.3 Bank and delegated monitoring3.2.4 Summary3.3 Monitoring and Capital3.3.1 Model setup3.3.2 Direct lending3.3.3 Banking solution3.3.4 Summary3.4 Credit rationing3.4.1 Model setup3.4.2 Credit rationing in market equilibrium3.4.3 Adverse selection and lending efficiency3.4.4 Summary3.5 Positive selection and excess lending3.5.1 Market equilibrium under positive selection3.5.2 Positive selection and excess lending3.5.3 Summary3.6 Empirical evidence3.6.1 Relationship banking3.6.2 Credit rationing3.7 Exercises
4.1 Introduction4.2 Price setting of competitive banks4.3 Competition and stability: a static choice4.3.1 Franchise value hypothesis4.3.2 Moral hazard hypothesis4.3.3 Summary4.4 Competition and stability: a dynamic choice4.4.1 Risk-taking as dynamic decision-making4.4.2 Risk-taking: short-run gain versus long-run loss4.4.3 Policy implication4.5 Market entry under asymmetric information4.5.1 Credit market with imperfect screening4.5.2 Competition and market outcome4.5.3 Winner’s curse on market entry4.6 Empirical evidence4.6.1 Measuring the intensity of competition4.6.2 Identifying the competition effects on bank behavior4.6.3 Real effects of banking competition4.7 Exercises
5.1 Introduction5.1.1 Risk appetite and securitization5.1.2 Procedure of securitization5.1.3 Repo and securitized banking5.2 Loan sale and screening5.2.1 Modelling loan sale and screening effort5.2.2 Inefficient screening with loan sales5.2.3 Summary5.3 Securitized banking and financial instability5.3.1 Originate-to-distribute and repo5.3.2 Market equilibrium5.3.3 Summary5.4 Repo runs5.4.1 Modelling dynamic collateralized lending5.4.2 Non-run equilibrium5.4.3 Run on the repos5.4.4 Summary5.5 Empirical evidence5.5.1 Does securitization encourage banks’ risk-taking?5.5.2 Securitization and bank performance5.5.3 International evidence5.6 Exercises
6.1 Introduction6.1.1 Organizational complexity6.1.2 Complexity in products6.1.3 Network complexity6.1.4 Opacity6.2 Strategic complexity in product6.2.1 Model setup: agents, preferences, and technologies6.2.2 Market power and product complexity6.2.3 Summary6.3 Network complexity6.3.1 Banking network as a web of claims6.3.2 Risk sharing through financial networks6.3.3 Contagion over banking network6.3.4 Summary6.4 Opacity and banking6.4.1 Model setup: agents, preferences, and technologies6.4.2 Market funding, bank funding, and the role of opacity6.4.3 Summary6.5 Empirical evidence6.5.1 Interbank network and contagion6.5.2 Opacity measures and bank risk6.6 Exercises
7.1 Introduction7.2 Central banking in practice7.2.1 Quantity tools and price tools7.2.2 Conducting monetary policy in normal times7.2.3 Conducting monetary policy in financial crises7.3 Monetary policy, liquidity management, and bank lending7.3.1 Bank lending and liquidity risk exposure7.3.2 Liquidity management and bank lending channel7.3.3 Summary7.4 Monetary policy, maturity transformation, and liquidity risks7.4.1 Maturity transformation in a monetary economy7.4.2 Central banking and excess liquidity risk7.4.3 Summary7.5 Risk-taking channels of monetary policy7.5.1 Modelling banks’ risk-shifting incentives7.5.2 Risk-taking channels7.5.3 Summary7.6 Empirical Evidence7.6.1 Identifying bank lending channel7.6.2 Risk-taking channel of monetary policy7.6.3 Bank lending under unconventional monetary policy7.7 Exercises
8.1 Introduction8.2 Costly state verification and the financial accelerator8.2.1 Lending under costly state verification8.2.2 Market equilibrium with no asymmetric information8.2.3 Market equilibrium with asymmetric information8.2.4 Summary8.3 Moral hazard and bank lending8.3.1 Aggregate deposit supply without financial friction8.3.2 Aggregate deposit demand under financial friction8.3.3 Summary8.4 Overborrowing and excess volatility8.4.1 Collateralized lending and borrowing constraint8.4.2 Binding borrowing constraint and excess volatility8.4.3 Summary8.5 Risk management and the leverage cycle8.5.1 Market equilibrium and asset price8.5.2 VaR, asset price, and the leverage cycle8.5.3 Summary8.6 General equilibrium effect and the leverage cycle8.6.1 Agents, time preferences, and technology8.6.2 Market equilibrium without borrowing8.6.3 Market equilibrium with borrowing8.6.4 The business cycle and the leverage cycle8.6.5 Summary8.7 Exercises
9.1 Introduction9.1.1 The ownership dimension of international banking9.1.2 The location dimension of international banking9.1.3 The currency dimension of international banking9.2 International financial market and global risk-sharing: traditional view9.2.1 Global risk-sharing in an endowment economy9.2.2 Global risk-sharing in a production economy9.2.3 Summary9.3 Global banks and international transmission of monetary policy9.3.1 Model setup: global bank and global balance sheet9.3.2 International transmission of monetary policy through global banks9.3.3 Summary9.4 Empirical evidence9.4.1 International banking and transmission of monetary policy9.4.2 International risk-taking channel9.5 Exercises
10.1 Introduction10.2 Government ownership and banking outcomes10.2.1 Government ownership and banking: main hypotheses10.2.2 Modelling government ownership and control rights10.2.3 Political economy equilibrium10.2.4 Summary10.3 Political credit cycle10.3.1 Reelection and credit supply to voters10.3.2 Credit supply over election cycles10.3.3 Summary10.4 Empirical evidence10.4.1 Government ownership and banking outcomes10.4.2 Legal systems and banking10.4.3 Political ties and banking outcomes10.4.4 Political credit cycles10.4.5 Moral suasion and home bias10.4.6 Political economy and allocation efficiency10.5 Exercises
11.1 Introduction11.1.1 Why is banking regulation special?11.1.2 Bank-specific versus systemic risks11.2 Maturity rat race and excess maturity mismatch11.2.1 Maturity structure of debt contracts11.2.2 Debt rollover and maturity rat race11.2.3 Summary11.3 Inefficient liquidity buffer and sellers’ strike11.3.1 Model setup11.3.2 Market equilibrium11.3.3 Summary11.4 Contagion in interbank market11.4.1 Idiosyncratic liquidity shocks and interbank market11.4.2 Equilibrium outcomes in the interbank market11.4.3 Contagion through interbank market11.4.4 Summary11.5 Macroprudential versus microprudential perspectives11.6 Empirical evidence: measuring systemic risks11.6.1 CoVaR11.6.2 Systemic expected shortfall11.6.3 SRISK11.7 Exercises
12.1 Introduction: banking regulation in principles12.2 Liquidity regulation12.2.1 Idiosyncratic and systemic liquidity risks12.2.2 Lender-of-last-resort policy12.2.3 Requirements on market liquidity and funding liquidity12.2.4 Liquidity regulation and monetary policy implementation: a conceptual assessment12.3 Capital regulation12.3.1 Bank capital and resilience12.3.2 Countercyclical capital requirement12.3.3 Capital requirement and risk-taking: a conceptual assessment12.3.4 Empirical evidence12.4 Other issues12.4.1 Interaction between banking regulation and monetary policy12.4.2 Bail-in12.5 Exercises

Overview

The Economics of Banking provides an accessible overview of banking theory and practice. It introduces readers to the building blocks of fundamental theories and provides guidance on state-of-the-art research, reflecting the dramatic changes in the banking industry and banking research over the past two decades.