What do banks do? Ask an economist and you’ll get a variety of answers. Banks play a vital role in allocating capital by linking savers and borrowers; they produce information by screening and monitoring borrowers; they create liquidity; they share and distribute risk; they engage in maturity transformation by borrowing short and lending long. What you won’t usually hear is that banks may help people stick to an optimal savings plan that they might not be able to stick to if they invested their money themselves. In other words, banks may serve as piggy banks by preventing people from ...
U.S. banking sector trends: assessing disparities in industry performance
An investigation of the extent to which variations in banking conditions over the past decade were associated with differences in bank size and holding company relationships, finding that very large banks had more problems with loan quality and poor profitability than did smaller banks, and that smaller banks benefited by affiliating with holding companies.
Piggy banks: financial intermediaries as a commitment to save
Savers with uncertain life spans cannot stick to long-term investment plans when they invest directly in liquid assets. Before horizons are known, all savers will plan to roll over their short-term assets if returns turn out high. Ex post, the short-term investors will consume their liquid assets rather than reinvest them. Delegating investment decisions to an intermediary reduces the commitment problem, and leads to more efficient portfolios. The higher return to savings should also increase savings rates.
A regional perspective on the credit view
An explanation of how regional credit-market performance can affect local economic activity, showing how imbalances in financial capacity across regions cause capital-poor regions to be underfunded. This reduced financial capacity is related to economic activity in states that are experiencing low growth.
In search of the elusive credit view: testing for a credit channel in modern Great Britain
An examination of the credit performance of the financial sector in the modern British economy, showing that problems in credit markets associated with debt and default/liquidation can disrupt the production of real financial services necessary to channel funds to efficient investment opportunities.
Loan sales as a response to market-based capital constraints
A model of bank asset sales in which information asymmetries create the incentive for unregulated banks to originate and sell loans to other banks, rather than fund them with deposit liabilities. Private information implies that bankers can fund local loans only to the extent that their capital can absorb potential losses. Loan sales are effectively a means of employing nonlocal bank capital to support local investments.
Portfolio risks and bank asset choice
An investigation of the effects of credit risk and interest-rate risk on bank portfolio choices, showing how bank capital inadequacy may prevent a bank from investing in the optimal portfolio and how the efficiency of the bank's intermediation technology affects its choice of second-best portfolio.
Securitization: more than just a regulatory artifact
An exploration of the recent boom in asset-backed lending, or securitization, by both financial institutions and nonbank firms, which the authors contend is more the result of improvements in information technology than a response to the regulatory costs of traditional bank funding.
The short-run dynamics of long-run inflation policy
An examination of the short- and long-term implications of an inflation policy on real output, using a method that allows structural interpretation of a simple VAR applied to a macroeconomic system that includes real output and inflation.
The role of banks in influencing regional flow of funds
A presentation of a theoretical model of regional banking using plausible information asymmetries to explain how local bank capital may affect the funding of regional investments, concluding that regional banking conditions can affect the efficiency of investment and the level of future aggregate output.