Questions and Answers of Economics Money Banking

How may bank output be measured?
What is the main regulatory condition of Basel I? What are the standard criticisms of Basel I?
A bank is trading on its own account $$10m$ of corporate bonds and $$5m$ of Treasuries. The daily volatility of corporate bonds is σ1 =0.9%, and the daily volatility of Treasuries is σ2 = 0.6%.
What is your dollar VaR when holding a UK portfolio of £100m if the current exchange rate is $$1.5$ per £, the correlation between the return on the UK portfolio and the exchange rate is ρ =
What do you understand by the term Quantitative Easing (QE)?What is the theoretical basis for QE? Comment on its success or otherwise in the UK.
Using the Hirshleifer (1958) model, show how financial intermediation improves the performance of an economy compared with financial autarky.
What is ‘financial intermediation’? Demonstrate the welfare superiority of the introduction of financial intermediation.
Outline the effects on the market rate of interest and the welfare implications for borrowers and savers of (a) an increase in desired savings and (b) an increase in desired investment.
What are retail banks? What are the main features of their balance sheets?
Let the balance sheet of the bank be described by L + R + T = D + E, where L is the stock of loans, R is the reserves, T is the stock of liquid assets, D is the deposits and E is the equity capital.
What do you understand by type 1 and type 2 rationing?
Consider an economy with politicians, voters, and a bank.Following the argument of the Nordhaus-MacRae model that politicians conduct credit policy through the bank under their control prior to
Allow two-party competition in the elections over infinite time horizon, $t=0,1, \ldots,+\infty$. Assume that there is an election every other period and two parties, $i=L, R$ ("left" and
Consider a market in which there are $N$ banks and $N$ buyers of securities. Each bank owns a security that ensures a return $R$ in the next period. Half of the securities ensure a return
Setups stay the same, except that there are multiple asset classes in banks' balance sheets. In particular, let's assume that $P_{1}$ is exogenous, and a fraction $\beta$ of each bank's assets is
Keeping all the setups unchanged, except the setting on uncertainty: instead of assuming crises are low probability events, from now on, assume that in $t=1$, the probability for the normal state
Consider an economy that extends over three periods, $t=0,1,2$, with a continuum of banks whose population is normalized to be 1. The banks engage in maturity transformation that finance long-term
Consider a one-period economy with a monopoly profitmaximizing bank that can invest in either of the following two types of assets:- Good assets: one unit of safe asset yields a gross return $G$
Consider a profit-maximizing bank's one-shot decision problem as follows: it can invest 1 dollar in either of the two projects- Project G, which yields a gross return $R_{G}$ with probability
Consider an economy that is populated by a bank, consumers whose population is normalized to be 1, and a regulator. Each consumer is born in $t=0$ with 1 unit of endowment, and they can invest in
Consider an economy that is populated by many identical riskneutral banks so that we can pick up an arbitrary representative bank and investigate its behavior. The bank makes loans at time 0, and the
The economy has $N$ banks, indexed by $i=1,2, \ldots, N$, and a continuum of depositors whose population is normalized to 1. Both banks and depositors are symmetrically distributed along a
Show that the constrained efficient allocation,can be replicated by decentralized banking equilibrium in incomplete networks described by Figures 6.3 and 6.4. Furthermore, show that the constrained
Keep all settings unchanged, except that, although theFigure 6.9 Another incomplete network The arrows describe the direction of deposit flows, for instance, bank A holds deposits from bank B, and
Consider an economy that is populated by a group of investors and a banker. They are all risk neutral and do not discount the future. The economy lasts for three periods:- In $t=0$, the banker
Keeping the settings of the Dang-Gorton-Holmström-Ordoñez model mostly unchanged, except that- The bank is the only financial firm in the economy, that provides a mixture of deposit contract and
Answer the following questions using the supply and demand analysis of the market for reserves.(a) Why is it that a decrease in the discount rate does not normally lead to an increase in borrowed
Consider a small open economy with a tradable goods sector and a nontradable goods sector. Only tradable goods can be traded internationally; nontradable goods have to be consumed domestically. The
Keeping all settings unchanged, except the shock in $t=0.5$ : suppose there is a shock to security return at the intermediate date, call it $t=0.5$, so that both types of investors have the
Explore BIS international banking statistics, the World Bank's Bank Regulation and Supervision Survey, as well as other national/ international data resources to better understand the implication of
Consider a small open economy which lasts for two periods, $t=1,2$. There is only one commodity that is tradable but it cannot be stored, and in each period the representative household is endowed
Follow the model of international banking with production economy, and keep all settings unchanged. Now assume that the shadow interest rate in autarky, $r^{A}$, is lower than the world interest
Assume that the bank makes a swap agreement with a "counterparty"-a global, non-financial firm that is headquartered in a foreign country and operates in both countries. In $t=0$, the firm invests
Suppose, in $t=0$, an investment bank is issuing mortgage-backed security (MBS), against an asset pool with two ex ante identical mortgage loans. Each loan will yield a gross return $R, R>1$ in
Consider a stylized economy with three financial instruments available:- A single piece of (subprime) mortgage;- Mortgage-backed security (MBS) of this single mortgage. The MBS tranching only
Keeping all the settings unchanged, with one additional assumption: the bank provides a guarantee for a share $\gamma$ of the loan that is sold to the market investors, against the realized losses
When analyzing the securitization equilibrium with repo lending \((0
Following Exercise 4: now we exclude the possibility of the sunspot bank run equilibrium that is characterized in Exercise 4 (a) and assume that patient consumers only withdraw at $t=1$ if their
Consider the equilibrium with intermediation, as described in Exercise 2 (d). Now we make several modifications in the setups:- In the beginning of $t=0$, a central bank creates fiat money and buys
Continue with the social planner's problem in the Allen-Gale model, Section 2.3. Given the planner's optimal choice on $c_{1} / c_{2}$ after $R$ is revealed $t=1$, solve problem (2.11) for the
Continue with the Holmström-Tirole model from Section 3.3. Keeping all the settings unchanged and assuming that the credit market is segmented as Figure 3.5 shows, with \(\underline{A}(\beta, R)(a)
Consider a risk-neutral firm, protected by limited liability, that wants to finance a project at a cost $I=1$. The project takes one period to complete. The firm has no initial wealth; hence to
In the Stiglitz and Weiss (1981) model (Section 3.4), when perfect competition in the deposit market forces banks to return all revenue to depositors as is defined in (3.24), ceteris paribus, show
In an economy there is a large number of risk-neutral entrepreneurs who are protected by limited liability, and have no initial wealth. The entrepreneurs undertake projects at a cost $I=1$. The
Consider an economy that is populated by many risk-neutral entrepreneurs (whose population is normalized to be 1) and many risk-neutral banks.Each entrepreneur has a project which needs initial
Exploring the data resources listed in Exercise 1, Chapter 1, depending on data availability, try to answer the following questions regarding bank competition in your country/region:(a) Plot the time
Consider an economy with $N$ banks, indexed by $i=1,2, \ldots, N$, and a continuum of depositors whose population is normalized to $D$. The depositors are evenly distributed along a circular
Consider a banking sector with a finite number $N$ limited liability banks that may operate over an infinite discrete time horizon, $T \rightarrow+\infty$. In each period, a representative bank
Assume that there are $n$ banks competing in the credit market. Instead of having each bank observe a private signal from each applicant, now assume that there is a credit rating agency providing
There is a growing list of publicly available online resources for consolidated banking statistics and macroeconomic data, including:• BIS statistics, Bank for International Settlements, available
Now expand your sample to a group of economies, such as OECD (Organisation for Economic Co-operation and Development) countries, G7, European Union, Eurozone, BRICS countries (Brazil, Russia, India,
Show that for the social planner's problem that is defined as (2.1) with budget constraints (2.2) and (2.3), the optimal solution $\left(c_{1}^{*}, c_{2}^{*}\right)$ fulfills \(1 max {a} pu(c) + (1
Consider a one-good, three-date economy: there are infinitely many ex ante identical consumers, each endowed with one unit of resource at $t=0$. Consumption takes place either at $t=1$ or
The reason why a market for exchange in $t=1$, Exchange Market, where patient and impatient consumers can exchange their assets does not achieve constrained efficient allocation is that the market
Consider the equilibrium with intermediation, as in Exercise 2 (d) in which banks offer consumers the deposit contracts $\left(c_{1}^{*}, c_{2}^{*}\right)$ at $t=0$.(a) Explain why there exist
What are the eurocurrency markets? Why have they grown in recent years?
What are the distinctive features of shadow banks and how do they differ from wholesale banks?
What are the types of international banking identified by the Bank for International Settlements and McCauley?
What have been the principal trends in international banking during the last two decades of the 20th century?
Are banks dead or are the reports grossly exaggerated?
What have been the three phases of bank deregulation during the 1980s and 1990s?
It has been suggested that financial innovation has been the result of three interacting forces. What are these?
What are the three principal forms of structural change in banking owing to financial innovation, as identified by Goodhart (1984)?
What are the three strands in the globalisation of banking identified by Canals (1997)?
What has been the long-term trend in net interest margin and bank profitability? Why has this occurred?
What is the role of the capital market in a modern economy?
Show how the loanable funds theory of interest rates depends on the behaviour of savers and investors.
How far does the view that the existence of financial intermediation benefits an economy depend on the assumptions underlying the Hirshleifer model?
Trace out the way in which a reduction in the desire to invest will lead to a reduction in interest rate.
How do borrowers and lenders differ in their requirements? Can banks reconcile these differences?
Why do banks exist?
What are the distinguishing features of financial intermediaries?
What is ‘special’ about a bank?
What are the sources of economies of scale and scope in banking?
What are the sources of transaction costs in the transfer of funds from surplus to deficit units?
What problems does ‘asymmetry of information’ create in the loan market? Can banks help reduce the impact of this problem?
Can rating agencies overcome the problem of asymmetry of information?
What are the main features of the different types of banks that operate in the developed economies?
What risks do all banks face in their operations?
It is argued that the trend to universal banking will leave no room for bank specialisation. Critically evaluate this argument and comment on the risks associated with the increased tendency towards
What are wholesale banks? How do they differ from retail banks in their operating methods?
What are the four different types of universal bank organisations identified by Saunders and Walters?
What advantage does a system of universal banks have relative to other types of banking?
How far are the differences between the various types of banks diminishing over time?
What are the distinctive features of Islamic banks and microfinance institutions? How do they differ from conventional retail banks?
Explain the growth of international banking during the second half of the 20th century. Regulatory avoidance has been claimed to be one of the reasons for this growth. Why has the growth in
What are the reasons for the growth in international banking?
What is the role of eurocurrency banking? Discuss the implications for the supply of eurodollars of a portfolio switch from domestic dollar deposits to eurodollar deposits.
What are the main assets and liabilities of a bank operating in the eurocurrency markets? To what extent is syndicated lending important?
Why would the following relationship be expected to hold in the eurocurrency markets: Where R£ is the nominal sterling rate of interest, R$ is the nominal eurodollar rate of interest on the
What are the consequences of the growth of the eurocurrency markets for the international financial system?
Outline the effects of a decrease in the desired ratio of currency to deposits on bank lending and deposit creation.
We do not have theories of the steel-producing firm or the automobile firm. Why do you think we need a theory of the banking firm?
What are the implications of an increase in the reserve–deposit ratio on the interest rate spread between loans and deposits?
Explain the effects of an increase in the interest elasticity of loans and deposits on the interest rate spread between loans and deposits.
What are the potential effects on UK banks if (or when) the UK joins the European Monetary Union?
What is the implication of an increase in the bill rate of interest on the loan rate and deposit rate in the Monti–Klein model of banking?
Discuss the contributions of the theories of the banking firm to our understanding of bank behaviour.
What is liability management? What is asset management?
How does a bank react to an increase in the demand for loans under conditions of liability management? What are the implications for the banking system as a whole of an increase in the demand for

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