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FINANCIAL
INTERMEDIATION:
5th Module, 2002/2003
Professor: Sudipto Bhattacharya,
ASU, LSE and CEPR (s.bhatt@lse.ac.uk)
TA: Konstantin Styrin
This course surveys the modern literature on financial
intermediation, utilising the tools of incomplete markets, game
theory and the theory of contracts. The role of banks in providing
investors and firms with liquidity, and firms cum entrepreneurs
with monitoring and information transmission cum aggregation
services, are emphasised. Topics covered include basic models
of these, as well as papers on the functioning of interbank
markets, bank runs and currency crises, security design, and
soft budget constraints in bank-oriented financial systems.
Readings include a background reference book coupled with twenty-odd
journal articles. Two problem sets and a final examination,
with weights of forty (twenty on each) and sixty percent respectively,
are used for grading students'absorption of analytical and critical
skills.
Reference Text: Xavier Freixas and Jean-Charles
Rochet, “Microeconomics of Banking”, MIT Press, Cambridge, MA (USA); ISBN 0-262-06193-7
Sessions
1,2: Liquidity and Financing,
Deposit and Interbank Contracts
Readings,
with emphasis on (*) ed ones:
- J.Bryant,
"A Model of Reserves, Bank Runs, and Deposit Insurance",
Journal of Banking
and Finance 4 (1980), 335-344
- D.W.
Diamond and P.H. Dybvig, "Bank Runs, Deposit Insurance,
and Liquidity", Journal
of Political Economy 91 (1983), 401- 419
(*)
- S.
Bhattacharya and D.Gale, "Preference Shocks, Liquidity,
and Central Bank Policy", in
New Approaches to Monetary Economics, W.Barnett and K.J.Singleton
(eds.), Cambridge
University Press (1987) (*)
- C.
Jacklin, "Demand Deposits, Trading Restrictions, and
Risk-Sharing", in Contractual Arrangements
for Intertemporal Trade, E.C.Prescott and N.Wallace (eds.),
Minneapolis: University
of Minnesota Press (1987)
-
G.
Gorton and G. Pennacchi, "Financial Intermediaries and
Liquidity Creation", Journal of Finance
45 (1990), 49-71
-
B.
Holmstrom and J. Tirole, " Private and Public Supply
of Liquidity", Journal of Political Economy
106 (1998), 1- 40 (*)
- D.
Diamond, "Liquidity, Banks, and Markets", Journal
of Political Economy 105 (1997), 928- 956
- M.
Hellwig, "Banks, Markets, and the Allocation of Risks
in an Economy", Journal of Institutional
and Theoretical Economics 154 (1998), 328-345 (*)
-
S.Bhattcharya,
P. Fulghieri, and R. Rovelli, " Financial Intermediation
versus Stock Markets in
a Dynamic Intertemporal Model", Journal of Institutional
and Theoretical Economics 154 (1998),
291-319
-
E-L.
von Thadden, “Liquidity”, manuscript (2002)
Sessions
3, 4: Bank Runs, Financial Crises, and Contagion
Readings, articles indicated with a (*) being essential:
-
C. Jacklin and S. Bhattacharya, “Distinguishing Panics and Information
Based Bank Runs: Welfare and Policy Implications”, Journal of Political Economy 96 ( 1988),
568-592
-
V.V. Chari and R. Jagannathan, “Banking Panics, Information and Rational
Expectations Equilibrium”, Journal of Finance 43 (1988),
749-760 (*)
-
F. Allen and D. Gale, “Optimal Financial Crises”, Journal of Finance 53
(1998), 1245-1284 (*)
-
H-S. Shin and S. Morris, “Unique Equilibrium in a Model of Self-Fulfilling
Currency Attacks”, American Economic Review 88 (1998), 587-597
(*)
- C.
Calomiris and C. Kahn, “The Role of Demandable Debt in Structuring
Optimal Banking Arrangements”,
American Economic Review 81 (1991), 497-513
- D,
Diamond and R. Rajan, “Liquidity Risk, Liquidity Creation,
and Financial Fragility, a Theory
of Banking”, Journal of Political Economy 109 (2001), 287-327
(*)
- D.
Diamond and R. Rajan, “A Theory of Bank Capital”, Journal
of Finance 55 (2000), 2431-2465
- J.C.
Rochet and J. Tirole, “Interbank Lending and Systemic Risk”,
Journal of Money, Credit and Banking 28, Part 2 (1996), 733-
762
- F.
Allen and D. Gale, “Financial Contagion”, Journal of Political
Economy 108 (2000), 1-33 (*)
- X.Freixas,
B. Parigi and J.C. Rochet, “Systemic Risk, Interbank Relations,
and Liquidity Provision
by the Central Bank”, Journal of Money, Credit and Banking
32 (2000), 611- 638
- X.
Freixas and C. Holthausen,“Interbank Market Integration under
Asymmetric Information”, Univeridad
Pompeu Fabra Manuscript (2001)
- V.
Acharya, “A Theory of Systemic Risk and Design of Prudential
Bank Regulation” (2001)
Sessions 5, 6, 7: Monitoring, Relationship
Lending, Security Design, and Governance
Readings,
articles indicated with a (*)
being essential:
- H.Leland
and D.H.Pyle, "Informational Asymmetries, Financial Structure,
and Financial Intermediation",
Journal of Finance 32 (May 1977), 371-387 (*)
- D.W.Diamond,
"Financial Intermediation and Delegated Monitoring",
Review of Economic Studies
51 (1984), 393-414 (*)
- J.Boyd
and E.C.Prescott, "Financial Intermediary Coalitions",
Journal of Economic Theory 38 (1986), 211-232
- C.M.
Krasa and A.P.Villamil, "Monitoring the Monitor: an Incentive
Structure for a
Financial Intermediary", Journal of Economic Theory 57
(1992), 197- 221 (*)
-
F.
Allen, "The Market for Information and the Origins of
Financial Intermediation", Journal of
Financial Intermediation 1 (1990), 3- 30
- P.
DeMarzo and D. Duffie, " A Liquidity-Based Model of Security
Design", Econometrica
- M.
Hellwig, “Financial Intermediation with Risk Aversion”, Review
of Economic Studies 67 (2000),
719-742 (*)
-
R.
Rajan, “Insiders and Outsiders: the Choice between Informed
and Arms-Length Debt”, Journal
of Finance 47 (1992), 1367-1400
- E-L.
von Thadden, “Long-term Contracts, Short-term Investment and
Monitoring”, Review of Economic Studies 62 (1995), 557-576
(*)
- M.
Dewatripont and E. Maskin, “Credit and Efficiency in Centralised
and Decentralised Economies”, Review of Economic Studies 62
(1995), 541- 556 (*)
- R.Repullo
and J.Suarez, "Monitoring, Liquidation and Security Design",
Review of Financial Studies
11 (1998), 163-187 (*)
- O.
Hart and J. Moore, “Default and Renegotiation: a Dynamic Model
of Debt”, Quarterly Journal
of Economics 113 (1998), 1-41
-
P.Bolton
and X. Freixas, "Equity, Bonds, and Bank Debt: Capital
Structure and Financial Market
Equilibrium under Asymmetric Information", J. of Political
Economy 108 (2000) (*)
-
P.
Bolton and X. Freixas, “Corporate Finance and the Monetary
Transmission Mechanism”, Princeton
University and University of
Pompeu-Fabra Manuscript (2001)
-
H.
Huang and C. Xu, “Financial Institutions, Financial Contagion
and Financial Crises”, IMF and LSE Manuscript (2000) (*)
-
M.
Giannetti, “Bank-Firm Relationships and Contagious Banking
Crises”, SITE, Stockholm
School
of Economics Manuscript (2001)
- C.
Matutes and X. Vives, “Competition for Deposits, Fragility,
and Insurance”, Journal of Financial
Intermediation” 5 (1996), 184-216
- M.O.Yanelle,
"Banking Competition and Market Efficiency", Review
of Economic Studies 64
(1997), 215-239
-
A.Winton,
"Competition among Financial Intermediaries when Diversification
Matters", Journal
of Financial Intermediation 6 (1997), 307-346 (*)
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