Microeconomics of Banking Second Edition. Xavier Freixas and Jean-Charles Rochet. The MIT Press Cambridge, Massachusetts London, England

Transcription

1 Microeconomics of Banking Second Edition Xavier Freixas and Jean-Charles Rochet The MIT Press Cambridge, Massachusetts London, England

2 List of Figures Preface xv xvii 1 Introduction What Is a Bank, and What Do Banks Do? Liquidity and Payment Services ' Money Changing " ' Payment Services ; Transforming Assets ' Managing Risks ' Credit Risk Interest Rate and Liquidity Risks Off-Balance-Sheet Operations ' Monitoring and Information Processing The Role of Banks in the Resource Allocation Process Banking in the Ariow-Debreu Model The Consumer The Firm The Bank ' General Equilibrium >.. : Outline of the Book ' - ' 10 2 The Role of Financial Intermediaries Transaction Costs ' Economies of Scope Economies of Scale.<-. ' ' Coalitions of Depositors and Liquidity Insurance The Model 20

3 viii Characteristics of the Optimal Allocation Autarky Market Economy ' Financial Intermediation Coalitions of Borrowers and the Cost of Capital A Simple Model of Capital Markets with Adverse Selection Signaling through Self-Financing andthe Cost of Capital Coalitions of Borrowers Suggestions for Further Reading Financial Intermediation.as Delegated Monitoring The Choice between Market Debt and Bank Debt A Simple Model of the Credit Market with Moral Hazard Monitoring and Reputation Monitoring and Capital Financial Architecture Credit Risk and Dilution Costs Liquidity Provision to Firms Suggestions for Further Reading Problems Strategic Entrepreneurs and Market Financing Market versus Bank Finance ' Economies of Scale in Information Production Monitoring as a Public Good and Gresham's Law Intermediation and Search Costs Intertemporal Insurance Solutions Strategic Entrepreneurs and Market Financing Market versus Bank Finance Economies of Scale in Information Production Monitoring as a Public Good and Gresham's Law Intermediation and Search Costs Intertemporal Insurance 62 3 The Industrial Organization Approach to Banking A Model of a Perfect Competitive Banking Sector The Model 70

4 3.1.2 The Credit Multiplier Approach The Behavior of Individual Banks in a Competitive Banking Sector The Competitive Equilibrium of the Banking Sector The Monti-Klein Model of a Monopolistic Bank The Original Model The Oligopolistic Version Empirical Evidence Monopolistic Competition Does Free Competition Lead to the Optimal Number of Banks? The Impact of Deposit Rate Regulation on Credit Rates Bank Network Compatibility Empirical Evidence^ The Scope of the Banking Firm Beyond Price Competition Risk Taking on Investments Monitoring and Incentives in a Financial Conglomerate Competition and Screening Relationship Banking ' The Ex Post Monopoly of Information Equilibrium with Screening and Relationship Banking Does Competition Threaten Relationship Banking? Intertemporal Insurance Empirical Tests of Relationship.Banking Payment Cards and Two-Sided Markets A Model of the Payment Card Industry Card Use Monopoly Network Competing Payment Card Networks Welfare Analysis. Ill 3.8 Problems Extension of the Monti-Klein Model to the Case of Risky Loans Compatibility between Banking Networks Double Bertrand Competition Deposit Rate Regulation 114

5 3.9 Solutions Extension of the Monti-Klein Model to the Case of Risky Loans Compatibility between Banking Networks Double Bertrand Competition ( Deposit Rate Regulation 118 The Lender-Borrower Relationship Why Risk Sharing Does Not Explain All the Features of Bank Loans Costly State Verification ' Incentive-Compatible Contracts ' :2 Efficient Incentive-Compatible Contracts Efficient Falsification-Proof Contracts Incentives to Repay Nonpecuniary Cqst of Bankruptcy Threat of Termination Impact of Judicial Enforcement Strategic Debt Repayment: The Case of a Sovereign Debtor Moral Hazard ' The Incomplete Contract Approach Private Debtors and the Inalienability of Human Capital ' Liquidity of Assets and Debt Capacity Soft Budget Constraints and Financial Structure ' Collateral as a Device for Screening Heterogeneous Borrowers Problems - ' Optimal Risk Sharing with Symmetric Information Optimal Debt Contracts with Moral Hazard The Optirnality of Stochastic Auditing Schemes The Role of Hard Claims in Constraining Management Collateral and Rationing ' ' ' Securitization Solutions ' Optimal Risk Sharing with Symmetric Information Optimal Debt Contracts with Moral Hazard ' The Optimality of Stochastic Auditing Schemes The Role of Hard Claims in Constraining Management 164

6 4.8.5 Collateral and Rationing Securitization 165 Equilibrium in the Credit Market and Its Macroeconomic Implications Definition of Equilibrium Credit Rationing The Backward-Bending Supply of Credit Equilibrium Credit Rationing Adverse Selection Costly State Verification Moral Hazard Equilibrium with a Broader Class of Contracts Problems The Model of Mankiw ' Efficient Credit Rationing ' Too Much In vestment' Solutions The Model of Mankiw ' Efficient Credit Rationing ' Too Much Investment 188 The Macroeconomic Consequences of Financial Imperfections A Short Historical Perspective The Transmission Channels of Monetary Policy The Different Channels A Simple Model Credit View versus Money View: Justification of the Assumptions and Empirical Evidence Empirical Evidence on the Credit View Financial Fragility and Economic Performance Financial Development and Economic Growth. 209 Individual Bank Runs and Systemic Risk Banking Deposits and Liquidity Insurance A Model of Liquidity Insurance Autarky The Allocation Obtained When a Financial Market Is Opened The Optimal (Symmetric) Allocation A Fractional Reserve Banking System 220

7 xii 7.2 The Stability of the Fractional Reserve System and Alternative Institutional Arrangements The Causes of Instability ' A First Remedy for Instability: Narrow Banking Regulatory Responses: Suspension of Convertibility or Deposit Insurance Jacklin's Proposal: Equity versus Deposits Bank Runs and Renegotiation A Simple Model ^ Pledgeable and Nonpledgeable Cash Flows Bank Runs as a Discipline Device ' The Role of Capital Efficient Bank Runs! ' Interbank Markets and the Management of Idiosyncratic Liquidity Shocks The Model of Bhattacharya and Gale The Role of the Interbank Market The Case of Unobservable Liquidity Shocks Systemic Risk and Contagion Aggregate Liquidity and Banking Crises ' Payment Systems and OTC Operations Contagion through Interbank Claims Lender of Last Resort: A Historical Perspective Views on the LLR Role Liquidity and Solvency: A Coordination Game The Practice of LLR Assistance The Effect of LLR and Other Partial Arrangements ' Problems Bank Runs and Moral Hazard Bank Runs Information-Based Bank Runs Banks'Suspension of Convertibility Aggregated Liquidity Shocks Charter Value Solutions Banks Runs and Moral Hazard Bank Runs 253

8 xiii Information-Based Bank Runs ' Banks' Suspension of Convertibility Aggregated Liquidity Shocks ' Charter Value Managing Risks in the Banking Firm Credit Risk Institutional Context Evaluating the Cost of Credit Risk Regulatory Response to Credit Risk Liquidity Risk ' Reserve Management Introducing Liquidity Risk into the Monti-Klein Model The Bank as a Market Maker Interest Rate Risk ' The Term Structure of'interest Rates Measuring Interest Rate Risk Exposure Applications to Asset Liability Management Market Risk Portfolio Theory: The Capital Asset Pricing Model The Bank as a Portfolio Manager: The Pyle-Hart-Jaffee Approach An Application of the Portfolio Model: The Impact of Capital Requirements ' Problems The Model of Prisman, Slovin, and Sushka The Risk Structure of Interest Rates Using the CAPM for Loan Pricing Solutions The Model of Prisman, Slovin, and Sushka The Risk Structure of Interest Rates Using the CAPM for Loan Pricing The Regulation of Banks The Justification for Banking Regulation The General Setting The Fragility of Banks The Protection of Depositors'and Customers'Confidence The Cost of Bank Failures 310

9 xiv 9.2 A Framework for Regulatory Analysis Deposit Insurance, The Moral Hazard Issue Risk-Related Insurance Premiums Is Fairly Priced Deposit Insurance Possible? The Effects of Deposit Insurance on the Banking Industry Solvency Regulations _ The Portfolio Approach ' Cost of Bank Capital and Deposit Rate Regulation The Incentive Approach, The Incomplete Contract Approach 324 9A5 The Three Pillars of Basel II The Resolution of Bank Failures Resolving Banks' Distress: Instruments and Policies Information Revelation and Managers' Incentives, Who Should Decide on Banks' Closure? Market Discipline Theoretical Framework Empirical Evidence Suggestions for Further Reading Problem Moral Hazard and Capital Regulation " Solution ' Moral Hazard and Capital Regulation. 340 Index ' 349