Economics of Banking

Kent Matthews is Associate Dean for Engagement & International Relations and the Sir Julian Hodge Professor of Banking and Finance at Cardiff Business School. He has held previous posts at the National Institute of Economic and Social Research, and the Bank of England, and has been a research visitor to the Hong Kong Monetary Authority.John Thompson is Emeritus Professor of Finance at Liverpool John Moores University.

• Preface xiChapter 1 : Trends in Domestic and International Banking 11.1 Introduction 11.2 Deregulation 31.3 Financial Innovation 41.4 Globalization 61.5 Profitability 81.6 The Future 161.7 Conclusion 191.8 Summary 19Questions 20Test Questions 21Chapter 2 : Financial Intermediation: The Impact of the Capital Market 232.1 Introduction 232.2 The Role of the Capital Market 242.3 Determination of the Market Rate of Interest 302.4 Summary 34Questions 35Test Questions 35Chapter 3 : Banks and Financial Intermediation 373.1 Introduction 373.2 Different Requirements of Borrowers and Lenders 383.3 Transaction Costs 403.4 Liquidity Insurance 433.5 Asymmetry of Information 463.6 Operation of the Payments Mechanism 513.7 Direct Borrowing from the Capital Market 513.8 Conclusion 523.9 Summary 53Questions 53Test Questions 53Chapter 4 : Banking Typology 554.1 Introduction 554.2 General Features of Banking 564.3 Retail Banking 594.4 Wholesale Banking 614.5 Universal Banking 634.6 Islamic Banking 644.7 Microfinance 664.8 Shadow Banking 684.9 Summary 70Questions 70Test Questions 70Chapter 5 : International Banking 715.1 Introduction 715.2 The Nature of International Banking 725.3 Growth of International Banking 755.4 The Eurocurrency Markets 775.5 Summary 84Questions 84Test Questions 85Chapter 6 : The Theory of the Banking Firm 876.1 Introduction 876.2 The Textbook Model 886.3 The Perfectly Competitive Bank 906.4 The Monopoly Bank 926.5 The Imperfect Competition Model 976.6 Summary 100Questions 100Test Questions 101Chapter 7 : Models of Banking Behaviour 1037.1 Introduction 1037.2 The Economics of Asset and Liability Management 1047.3 Liquidity Management 1047.4 Loan Pricing 1097.5 Asset Management 1127.6 The Real Resource Model of Asset and Liability Management 1187.7 Liability Management and Interest Rate Determination 1207.8 Summary 123Questions 124Test Questions 124Chapter 8 : Credit Rationing 1258.1 Introduction 1258.2 The Availability Doctrine 1268.3 Theories of Credit Rationing 1278.4 Asymmetric Information and Adverse Selection 1298.5 Adverse Incentive 1308.6 Screening versus Rationing 1338.7 Empirical Evidence 1358.8 The Existence of Credit Rationing 1368.9 Summary 139Questions 140Test Questions 140Chapter 9 : Securitization 1419.1 Introduction 1419.2 Sales of Securities through Financial Markets 1449.3 Asset-Backed Securitization (ABS) 1469.4 The Process of Asset-Backed Securitization 1479.5 The Gains from Asset-Backed Securitization 1489.6 Conclusions 1559.7 Summary 155Questions 155Test Questions 156Chapter 10 : Banking Efficiency and the Structure of Banking 15710.1 Introduction 15710.2 Measurement of Output 15710.3 Performance Measures 15910.4 Reasons for the Growth of Mergers and Acquisitions 16910.5 Motives for Mergers 17210.6 Empirical Evidence 17310.7 Summary 179Questions 180Test Questions 180Chapter 11 : Banking Competition 18111.1 Introduction 18111.2 Concentration in Banking Markets 18211.3 Structure–Conduct–Performance 18411.4 Competition Analysis 18611.5 Competition in the UK Banking Market 19211.6 Summary 198Questions 198Test Questions 199Chapter 12 : Bank Regulation 20112.1 Introduction 20112.2 The Case for Regulation 20212.3 The Case against Regulation 20912.4 Regulation 21512.5 Summary 228Questions 228Test Questions 228Chapter 13 : Banks and Money Laundering 22913.1 Introduction 22913.2 Scale, Scope and Typology 23013.3 Microeconomics of Money Laundering 23513.4 Macroeconomics of Money Laundering 24113.5 Combating Money Laundering 24213.6 Summary 244Questions 245Test Questions 245Chapter 14 : Risk Management 24714.1 Introduction 24714.2 Risk Typology 24814.3 Interest Rate Risk Management 25014.4 Market Risk 26014.5 Credit Risk 27014.6 Operational Risk 27914.7 Risk Management and the Global Banking Crisis 27914.8 Conclusion 28314.9 Summary 284Questions 284Test Questions 285Chapter 15 : The Macroeconomics of Banking 28715.1 Introduction 28715.2 The Economics of Central Banking 28815.3 Financial Innovation and Monetary Policy 29715.4 Bank Credit and the Transmission Mechanism 30215.5 Summary 309Questions 309Test Questions 310References 311Index 323