Professional Documents
Culture Documents
Recap
2
Liquidity
10
Government Regulation
11
Financial Intermediaries
12
Financial Intermediaries
13
Although it does not take into account the possibility that firms
provide information to the market, the asymmetric information
theory offers a convincing explanation of the existence of
financial intermediaries.
Financial Intermediaries
14
Large
Recent
Problems
19
Problems
20
Problems
21
With the best risk peeled off, the average risk is less
valuable, inducing borrowers of the next best risk to deal
with the intermediary.
22
Company
23
shareholders
management
25
Company
(Borrower)
1. Monitoring.
4. Debt contracts.
1. Monitoring
27
Monitoring
28
Monitoring
29
2. Government Regulation
30
Government Regulation
31
Laws
Corporates
Government
3. Financial Intermediaries
32
Financial Intermediaries
33
Moral Hazard
34
4. Debt Contracts
35
36
Company
(Borrower)
Other tools:
Financial intermediaries.
Example : Co-risk
40
borrowings
Own funds
Examples are:
Covenants
43
Covenants
44
Monitoring
45
3. Financial Intermediaries
46
3. Financial Intermediaries
47
Delegated monitoring
48
The cash flow that the firm obtains from its investment is
unobservable to lenders.
or designing a debt contract characterised by a nonpecuniary cost C (i.e. unmonitored direct lending)
57
58
61
The decline in the share of financial assets held by banks does not
necessarily indicate that the banking industry is in decline. In fact
we have two indicators that banks have been doing quite well.
62
US Banking ROA
63
US Banking ROE
64
(iii)
in the 1980s, changes in regulation (elimination of
ceilings on time deposit interest rates):
Because investors can screen out bad and good credit risks,
firms go to the cheaper commercial paper market rather
than to banks to raise short-term funds.
Securitisation in EU
74
Riskier Lending
76
Riskier Lending
77
There has been a strong increase in income from offbalance sheet activities as a share of total bank income in
the period since the 1960s.
Summary
81
Summary
82
Summary
83
However,
3.
a. Explain how financial intermediaries are able to reduce
transaction costs in the economy. (Part 1)
b. Explain how financial intermediaries are able to
reduce/solve the problems arising from adverse selection
and moral hazard. (inequity and debt contract) (Part 2)
4.There is evidence that traditional banking has declined in
recent years in countries such as the USA and the UK.
Discuss. (but doing well see ratios; also increase in
riskier activities) (Part 2)
5.
a. Explain the hypotheses, the framework and the main findings of
the delegated monitoring theory. (moral hazard in debt contracts;
banks as delegated monitor) (Part 2)
b. How is the free-rider problem related to information asymmetries
in financial markets? (both AS & MH) (Part 2)
6.
a. What factors have caused the decline in the share of financial
assets held by the US banks in recent years? (competition
resulting in reducing cost and income advantage) (Part 2)
b. What have been the main consequences of disintermediation for
banks? (traditional business decline, hence go into non-traditional
area with higher risks OBS and Proprietary Activities) (Part 2)