The Economics of Banking

Cover
Half Title
Title Page
Copyright Page
Contents in Brief
Table of Contents
List of figures
Preface
Acknowledgments
Acronyms
PART I: INTRODUCTION
	CHAPTER 1 INTRODUCTION
		1.1 What are banks and why are they special?
		1.2 Structure of this book
		1.3 Exercises
PART II: THE MICROECONOMICS OF BANKING
	CHAPTER 2 FRAGILE BANKS
		2.1 Introduction
		2.2 Bank liquidity creation and bank run
			2.2.1 Liquidity preferences and the need for liquidity insurance
			2.2.2 Baseline result: the planner’s solution
			2.2.3 Resource allocation in a decentralized economy
			2.2.4 Bank run: fundamental-driven versus panic-driven
			2.2.5 Fragile banks and policy implications
			2.2.6 Equilibrium refinement and equilibrium selection
			2.2.7 Summary
		2.3 Optimal bank run
			2.3.1 Modelling aggregate asset return risks
			2.3.2 Optimal risk-sharing with zero liquidation cost
			2.3.3 Optimal risk-sharing with positive liquidation cost
			2.3.4 Summary
		2.4 Fragility and bank liquidity
			2.4.1 Model setup: the need for fragility
			2.4.2 Constrained efficiency
			2.4.3 Market liquidity and funding liquidity
			2.4.4 Summary
		2.5 Empirical evidence: drivers of bank runs and policy responses
		2.6 Exercises
	CHAPTER 3 INFORMATION FRICTIONS IN BANKING
		3.1 Introduction
		3.2 Bank as delegated monitor
			3.2.1 Asymmetric information and monitoring
			3.2.2 Costly monitoring under direct lending
			3.2.3 Bank and delegated monitoring
			3.2.4 Summary
		3.3 Monitoring and Capital
			3.3.1 Model setup
			3.3.2 Direct lending
			3.3.3 Banking solution
		3.3.4 Summary
		3.4 Credit rationing
			3.4.1 Model setup
			3.4.2 Credit rationing in market equilibrium
			3.4.3 Adverse selection and lending efficiency
			3.4.4 Summary
		3.5 Positive selection and excess lending
			3.5.1 Market equilibrium under positive selection
			3.5.2 Positive selection and excess lending
			3.5.3 Summary
		3.6 Empirical evidence
			3.6.1 Relationship banking
			3.6.2 Credit rationing
		3.7 Exercises
	CHAPTER 4 INDUSTRIAL ORGANIZATION OF BANKING
		4.1 Introduction
		4.2 Price setting of competitive banks
		4.3 Competition and stability: a static choice
			4.3.1 Franchise value hypothesis
			4.3.2 Moral hazard hypothesis
			4.3.3 Summary
		4.4 Competition and stability: a dynamic choice
			4.4.1 Risk-taking as dynamic decision-making
			4.4.2 Risk-taking: short-run gain versus long-run loss
			4.4.3 Policy implication
		4.5 Market entry under asymmetric information
			4.5.1 Credit market with imperfect screening
			4.5.2 Competition and market outcome
			4.5.3 Winner’s curse on market entry
		4.6 Empirical evidence
			4.6.1 Measuring the intensity of competition
			4.6.2 Identifying the competition effects on bank behavior
			4.6.3 Real effects of banking competition
		4.7 Exercises
	CHAPTER 5 SECURITIZED BANKING
		5.1 Introduction
			5.1.1 Risk appetite and securitization
			5.1.2 Procedure of securitization
			5.1.3 Repo and securitized banking
		5.2 Loan sale and screening
			5.2.1 Modelling loan sale and screening effort
			5.2.2 Inefficient screening with loan sales
			5.2.3 Summary
		5.3 Securitized banking and financial instability
			5.3.1 Originate-to-distribute and repo
			5.3.2 Market equilibrium
			5.3.3 Summary
		5.4 Repo runs
			5.4.1 Modelling dynamic collateralized lending
			5.4.2 Non-run equilibrium
			5.4.3 Run on the repos
			5.4.4 Summary
		5.5 Empirical evidence
			5.5.1 Does securitization encourage banks’ risk-taking?
			5.5.2 Securitization and bank performance
			5.5.3 International evidence
		5.6 Exercises
	CHAPTER 6 COMPLEXITY IN BANKING
		6.1 Introduction
			6.1.1 Organizational complexity
			6.1.2 Complexity in products
			6.1.3 Network complexity
			6.1.4 Opacity
		6.2 Strategic complexity in product
			6.2.1 Model setup: agents, preferences, and technologies
			6.2.2 Market power and product complexity
			6.2.3 Summary
		6.3 Network complexity
			6.3.1 Banking network as a web of claims
			6.3.2 Risk sharing through financial networks
			6.3.3 Contagion over banking network
			6.3.4 Summary
		6.4 Opacity and banking
			6.4.1 Model setup: agents, preferences, and technologies
			6.4.2 Market funding, bank funding, and the role of opacity
			6.4.3 Summary
		6.5 Empirical evidence
			6.5.1 Interbank network and contagion
			6.5.2 Opacity measures and bank risk
		6.6 Exercises
PART III: THE MACROECONOMICS AND POLITICAL ECONOMY OF BANKING
	CHAPTER 7 CENTRAL BANKING
		7.1 Introduction
		7.2 Central banking in practice
			7.2.1 Quantity tools and price tools
			7.2.2 Conducting monetary policy in normal times
			7.2.3 Conducting monetary policy in financial crises
		7.3 Monetary policy, liquidity management, and bank lending
			7.3.1 Bank lending and liquidity risk exposure
			7.3.2 Liquidity management and bank lending channel
			7.3.3 Summary
		7.4 Monetary policy, maturity transformation, and liquidity risks
			7.4.1 Maturity transformation in a monetary economy
			7.4.2 Central banking and excess liquidity risk
			7.4.3 Summary
		7.5 Risk-taking channels of monetary policy
			7.5.1 Modelling banks’ risk-shifting incentives
			7.5.2 Risk-taking channels
			7.5.3 Summary
		7.6 Empirical Evidence
			7.6.1 Identifying bank lending channel
			7.6.2 Risk-taking channel of monetary policy
			7.6.3 Bank lending under unconventional monetary policy
		7.7 Exercises
	CHAPTER 8 THE BANKING-MACRO LINKAGES
		8.1 Introduction
		8.2 Costly state verification and the financial accelerator
			8.2.1 Lending under costly state verification
			8.2.2 Market equilibrium with no asymmetric information
			8.2.3 Market equilibrium with asymmetric information
			8.2.4 Summary
		8.3 Moral hazard and bank lending
			8.3.1 Aggregate deposit supply without financial friction
			8.3.2 Aggregate deposit demand under financial friction
			8.3.3 Summary
		8.4 Overborrowing and excess volatility
			8.4.1 Collateralized lending and borrowing constraint
			8.4.2 Binding borrowing constraint and excess volatility
			8.4.3 Summary
		8.5 Risk management and the leverage cycle
			8.5.1 Market equilibrium and asset price
			8.5.2 VaR, asset price, and the leverage cycle
			8.5.3 Summary
		8.6 General equilibrium effect and the leverage cycle
			8.6.1 Agents, time preferences, and technology
			8.6.2 Market equilibrium without borrowing
			8.6.3 Market equilibrium with borrowing
			8.6.4 The business cycle and the leverage cycle
			8.6.5 Summary
		8.7 Exercises
	CHAPTER 9 INTERNATIONAL BANKING
		9.1 Introduction
			9.1.1 The ownership dimension of international banking
			9.1.2 The location dimension of international banking
			9.1.3 The currency dimension of international banking
		9.2 International financial market and global risk-sharing: traditional view
			9.2.1 Global risk-sharing in an endowment economy
			9.2.2 Global risk-sharing in a production economy
			9.2.3 Summary
		9.3 Global banks and international transmission of monetary policy
			9.3.1 Model setup: global bank and global balance sheet
			9.3.2 International transmission of monetary policy through global banks
			9.3.3 Summary
		9.4 Empirical evidence
			9.4.1 International banking and transmission of monetary policy
			9.4.2 International risk-taking channel
		9.5 Exercises
	CHAPTER 10 POLITICAL ECONOMY IN BANKING
		10.1 Introduction
		10.2 Government ownership and banking outcomes
			10.2.1 Government ownership and banking: main hypotheses
			10.2.2 Modelling government ownership and control rights
			10.2.3 Political economy equilibrium
			10.2.4 Summary
		10.3 Political credit cycle
			10.3.1 Reelection and credit supply to voters
			10.3.2 Credit supply over election cycles
			10.3.3 Summary
		10.4 Empirical evidence
			10.4.1 Government ownership and banking outcomes
			10.4.2 Legal systems and banking
			10.4.3 Political ties and banking outcomes
			10.4.4 Political credit cycles
			10.4.5 Moral suasion and home bias
			10.4.6 Political economy and allocation efficiency
		10.5 Exercises
PART IV: THE ECONOMICS OF BANKING REGULATION
	CHAPTER 11 SYSTEMIC RISKS AND MACROPRUDENTIAL REGULATION
		11.1 Introduction
			11.1.1 Why is banking regulation special?
			11.1.2 Bank-specific versus systemic risks
		11.2 Maturity rat race and excess maturity mismatch
			11.2.1 Maturity structure of debt contracts
			11.2.2 Debt rollover and maturity rat race
			11.2.3 Summary
		11.3 Inefficient liquidity buffer and sellers’ strike
			11.3.1 Model setup
			11.3.2 Market equilibrium
			11.3.3 Summary
		11.4 Contagion in interbank market
			11.4.1 Idiosyncratic liquidity shocks and interbank market
			11.4.2 Equilibrium outcomes in the interbank market
			11.4.3 Contagion through interbank market
			11.4.4 Summary
		11.5 Macroprudential versus microprudential perspectives
		11.6 Empirical evidence: measuring systemic risks
			11.6.1 CoVaR
			11.6.2 Systemic expected shortfall
			11.6.3 SRISK
		11.7 Exercises
	CHAPTER 12 BANKING REGULATION IN PRACTICE
		12.1 Introduction: banking regulation in principles
		12.2 Liquidity regulation
			12.2.1 Idiosyncratic and systemic liquidity risks
			12.2.2 Lender-of-last-resort policy
			12.2.3 Requirements on market liquidity and funding liquidity
			12.2.4 Liquidity regulation and monetary policy implementation: a conceptual assessment
		12.3 Capital regulation
			12.3.1 Bank capital and resilience
			12.3.2 Countercyclical capital requirement
			12.3.3 Capital requirement and risk-taking: a conceptual assessment
			12.3.4 Empirical evidence
		12.4 Other issues
			12.4.1 Interaction between banking regulation and monetary policy
			12.4.2 Bail-in
		12.5 Exercises
PART V: APPENDIX
	SOLUTIONS TO SELECTED EXERCISES
Bibliography
Index