Introduction to Banking Concepts

Front

What is special about banks?

Back

A financial claim carries an obligation on the issuer to pay interest periodically and to redeem the claim at a stated value in one of three ways: on demand, after giving a stated period of notice, or on a definite date.

Front

What are the roles of lenders and borrowers?

Back

Borrowers are deficit units while lenders are surplus units.

Front

What are financial claims?

Back

Any financial asset, such as money, bank deposit accounts, bonds, shares, loans, life insurance policies, etc.

Front

What do financial intermediaries help minimize?

Back

They help minimize the costs associated with direct lending, particularly transaction costs and those derived from information asymmetries.

Front

What transformations do banks perform?

Back

Banks perform size transformation, maturity transformation, and risk transformation.

Front

What is asymmetric information?

Back

Not everyone has the same information; everyone has less than perfect information, and some parties have 'inside' information not available to both sides of a transaction.

Front

What are the costs and benefits of financial intermediation?

Back

The costs include transaction costs and risks, while the benefits include improved access to funds and reduced costs for borrowers.

Front

What is delegated monitoring?

Back

A concept where banks monitor borrowers on behalf of lenders to reduce information asymmetries.

Front

How do adverse selection and moral hazard affect bank lending?

Back

They create risks for banks, which can be minimized through careful screening and monitoring of borrowers.

Front

What is the significance of the 2007-2009 financial crisis?

Back

It highlighted the risks associated with shadow banking and the importance of securitization and collateral intermediation.