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Lecture notes Economics Of Banking The Economics of Money, Banking and Financial Markets plus Pearson MyLab Economics with Pearson eText, Global Edition, ISBN: 9781292268965$4.27
Lecture notes Economics Of Banking The Economics of Money, Banking and Financial Markets plus Pearson MyLab Economics with Pearson eText, Global Edition, ISBN: 9781292268965
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Course
Economics Of Banking
Institution
Rijksuniversiteit Groningen (RuG)
Book
The Economics of Money, Banking and Financial Markets plus Pearson MyLab Economics with Pearson eText, Global Edition
Lecture notes study book The Economics of Money, Banking and Financial Markets plus Pearson MyLab Economics with Pearson eText, Global Edition of Frederic S. Mishkin - ISBN: 9781292268965, Edition: 12th edition, Year of publication: - (lectures + recap)
Economics of banking
Lecture 1: Course introduction; CH 1-3
Without frictions, markets are efficient allocation mechanism:
• No transaction costs.
• No agency problems.
Not everyone has knowledge which are good projects.
• Or the risk appetite.
Banks:
Instead of directly dealing with a counterparty, work via a bank:
• Decreased transaction costs.
o Economies of scale.
• Reduced risk exposure.
o Diversification.
• Agency problems.
o Adverse selection.
▪ Screening before approving the loan (Stiglitz and Weiss, 1981; relationship
banking Boot, 2000)
o Moral hazard:
▪ Monitoring after approving then loan.
▪ Covenant.
EU Bank:
• Bank-based
US Bank:
• Market based.
o = bonds.
o = debt securities.
,Equity = stock market
What do banks do?
• Commercial banks & Universal banks:
o Take deposits.
o Make loans.
• Universal banks:
o Insurance.
o Investment banking.
▪ Raising debt and equity; M&A advice, etc.
Commercial bank = Retail bank.
Balance sheet of a bank:
Income statement of a bank:
,Lecture 2; Interest rates, CH 4-6.
Yield = Coupon payment / face value
Face value = Coupon payment / Yield
Real interest rate = YTM (interest rate) – Inflation rate
• Discount bonds: Bonds that promise a single payment (face value) upon maturity.
• Coupon bonds: Bonds that promise multiple payments (coupon payments) before maturity
and one payment, the face value, at maturity.
• Zero coupon bonds: does not issue such interest payments.
• Corporate bond: With corporate bonds, the bond issuer may default—that is, it might not
pay back the full amount promised in the bond prospectus.
Interest rates and banks’ business models:
Most important asset = loans
Most important liabilities = deposits
and bonds.
, Yield curve:
• Banks ‘live’ off the yield curve.
What is the yield curve:
• “Term structure”, different interest rates paid by bonds with same level of risk but different
maturities.
o Often default-free, riskless government bonds.
o Benchmark for debt rates in the market.
Yield curve plots equilibrium interest rate:
• Demand factors
o Wealth
o Expected interest rate.
o Expected inflation.
o Risk
o Liquidity
• Supply factors
o Expected profitable opportunities (corporate)
o Budget deficit (government)
o Expected inflation.
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