By Kent Matthews
The Economics of Banking describes and explains traits and operations in banking inside of an available microeconomic framework. It comprises thought with the sensible elements of banking for you to set banking in the economics paradigm. a main part on traits inside banking leads directly to chapters at the microeconomics of banking, marketplace constitution and law. the final target is to supply a mathematically obtainable microeconomic context that might support scholars comprehend and study traits and operations in banking.
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Additional resources for The Economics of Banking
If K is the cost of monitoring, then the total cost of monitoring without a bank is mK. The introduction of a bank changes the situation. 13 It is readily apparent that ðK þ DÞ will be less than mK so that the introduction of a bank has lowered the cost of intermediation. 3. The analysis so far assumes that the monitoring cost per loan remains the same, but, as noted earlier, the monitoring cost per transaction would be expected to fall because of the existence of economies of scale and scope. There is still the problem for the lenders/depositors to monitor the behaviour of the bank since the depositors will not be able to observe the information gleaned by the bank about the borrowers.
Seeing that the borrower adheres to the terms of the contract. ASYMMETRY OF INFORMATION 43 A bank has a special advantage in the monitoring process since it will often be operating the client’s current account and will therefore have private information concerning the client’s £ows of income and expenditure. This factor is very important in the case of small- and medium-sized companies and arises from the fact that banks are the main operators in the payments mechanism. A bank will require a ¢rm to produce a business plan before granting a loan.
Savers and borrowers have di¡erent requirements, which favours ¢nancial intermediation. Financial intermediaries carry out size, risk and maturity transformation. Operation of the payments mechanism a¡ords the banks advantages in the process of ¢nancial intermediation. 15 This is one reason disintermediation has occurred. The question of reputation also a¡ects banks. In some cases banks have attracted lower credit ratings from the agencies so that ¢rstclass companies may be able to borrow at lower rates of interest than banks have to pay on deposits.
The Economics of Banking by Kent Matthews