Lectures Flashcards

1
Q

What is a bank?

A

An institution whose current operations consist of granting loans and receiving deposits from the public

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2
Q

What mechanism do banks provide?

A

They transfer and efficiently allocate surplus funds from savers to borrowers

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3
Q

Do we really need banks?

A

Yes we do! They bridge the gap between borrowers and lenders and reconcile their often incompatible needs and objectives

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4
Q

What are the lenders’ and borrowers’ incompatible needs?

A

Timings
Length of loan
Liquidity
Low cost funds etc

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5
Q

What is indirect finance?

A

Raising capital through financial intermediaries (banks)

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6
Q

What is direct finance?

A

Borrowers borrow directly from the financial market

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7
Q

What are the roles of banks?

A

Provide liquidity
Transforming asset
Managing risk
Processing information

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8
Q

What is maturity transformation?

A

Banks transform funds lent for short periods of time into securities with long term maturities i.e. loans

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9
Q

What is size transformation?

A

Generally deposits are smaller than the loans that people require. Banks repackage smaller loans into larger ones

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10
Q

How do banks manage risk?

A

They diversify their investments
Screen and monitor borrowers
Hold capital reserves

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11
Q

What is their processing information and monitoring role?

A

Banks have a role in managing problems resulting from imperfect information on borrowers. They invest in IT to better screen clients. Long term relationships let’s them cumulate into to mitigate moral hazard

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12
Q

Fundamentally why do banks exist?

A

Delegated monitoring - expertise and economies of scale in processing risk information.
Information production - there would be duplication of information if people acted individually.
Liquidity transformation - turn liquid deposits into illiquid assets
Consumption smoothing - they provide liquidity whenever it’s needed

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13
Q

Would banks exist in a frictionless world?

A

No

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14
Q

What is a frictionless economy called?

A

Arrow-Debreu

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15
Q

Why do banks exist? Leland Pyle

A

Information sharing coalitions
Financial intermediation as delegated monitoring
Liquidity

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