Contemporary Financial Intermediation

3rd Edition - September 2, 2015
Authors: Stuart I. Greenbaum, Anjan V. Thakor, Arnoud W. A. Boot
Language: English
Hardback ISBN:
9 7 8 - 0 - 1 2 - 4 0 5 1 9 6 - 6
eBook ISBN:
9 7 8 - 0 - 1 2 - 4 0 5 9 2 8 - 3

In Contemporary Financial Intermediation, Third Edition, Greenbaum, Thakor and Boot offer a distinctive approach to financial markets and institutions, presenting an integrate… Read more

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In Contemporary Financial Intermediation, Third Edition, Greenbaum, Thakor and Boot offer a distinctive approach to financial markets and institutions, presenting an integrated portrait that puts information at the core.

Instead of simply naming and describing markets, regulations, and institutions as competing books do, the authors explore the endless subtlety and plasticity of financial institutions and credit markets.

This edition has six new chapters and increased, enhanced pedagogical supplements. The book is ideal for anyone working in the financial sector, presenting professionals with a comprehensive understanding of the reasons why markets, institutions, and regulators act as they do. Readers will find an unmatched, thorough discussion of the world's financial markets and how they function.

Preface
Acknowledgments
About the Authors
Introduction
Part I: The Background
- Chapter 1: Basic Concepts
  - Abstract
  - Introduction
  - Risk Preferences
  - Diversification
  - Riskless Arbitrage
  - Options
  - Market Efficiency
  - Market Completeness
  - Asymmetric Information and Signaling
  - Agency and Moral Hazard
  - Time Consistency
  - Nash Equilibrium
  - Revision of Beliefs and Bayes Rule
  - Liquidity
  - Systemic Risk
  - Disagreement
  - Mark-to-Market Accounting
Part II: What is Financial Intermediation?
- Chapter 2: The Nature and Variety of Financial Intermediation
  - Abstract
  - Glossary of Terms
  - Introduction
  - What are Financial Intermediaries?
  - The Variety of Financial Intermediaries
  - Depository Financial Intermediaries
  - Investment Banks: Key Nondepository Intermediaries in the Capital Market
  - Separation Between Investment Banks and Commercial Banks Undone
  - Other Nondepository Intermediaries
  - Credit Rating Agencies
  - The Role of the Government
  - Financial Intermediaries on the Periphery
  - Conclusion
  - Review Questions
  - Appendix 2.1. Measurement Distortions and the Balance Sheet
- Chapter 3: The What, How, and Why of Financial Intermediaries
  - Abstract
  - Glossary of Terms
  - Introduction
  - How Does the Financial System Work?
  - Business Financing: Debt
  - Fractional Reserve Banking and the Goldsmith Anecdote
  - A Model of Banks and Regulation
  - The Macroeconomic Implications of Fractional Reserve Banking: the Fixed Coefficient Model
  - Large Financial Intermediaries
  - How Banks can Help to Make Nonbank Financial Contracting More Efficient
  - The Empirical Evidence: Banks are Special
  - Ownership Structure of Depository Financial Institutions
  - The Borrower’s Choice of Finance Source
  - Conclusion
  - Review Questions
  - Appendix 3.1. The Formal Analysis of Large Intermediaries
  - Appendix 3.2. Definitions
Part III: Identification and Management of Major Banking Risks
- Chapter 4: Bank Risks
  - Abstract
  - Glossary of Terms
  - Introduction
  - Basic Banking Risks
  - Credit, Interest Rate, and Liquidity Risks
  - Enterprise Risk Management
  - Conclusion
  - Review Questions
- Chapter 5: Interest Rate Risk
  - Abstract
  - Glossary of Terms
  - Introduction
  - The Term Structure of Interest Rates
  - The Lure of Interest Rate Risk and Its Potential Impact
  - Duration
  - Convexity
  - Interest Rate Risk
  - Conclusion
  - Case Study: Eggleston State Bank
- Chapter 6: Liquidity Risk
  - Abstract
  - Glossary of Terms
  - Introduction
  - What, After All, is Liquidity Risk?
  - Some Formal Definitions of Liquidity
  - The Management of Liquidity Risk
  - The Difficulty of Distinguishing Between Liquidity and Insolvency Risks and the LLR’s Conundrum
  - Conclusion
  - Review Questions
  - Appendix 6.1. Dissipation of Withdrawal Risk Through Diversification
  - Appendix 6.2. Lender-of-Last-Resort Moral Hazard
Part IV: “On Balance Sheet” Banking Activities
- Chapter 7: Spot Lending and Credit Risk
  - Abstract
  - Glossary of Terms
  - Introduction
  - Description of Bank Assets
  - What is Lending?
  - Loans Versus Securities
  - Structure of Loan Agreements
  - Informational Problems in Loan Contracts and the Importance of Loan Performance
  - Credit Analysis: the Factors
  - Sources of Credit Information
  - Analysis of Financial Statements
  - Loan Covenants
  - Conclusion
  - Case Study: Indiana Building Supplies, Inc
  - Review Questions
- Chapter 8: Further Issues in Bank Lending
  - Abstract
  - Glossary of Terms
  - Introduction
  - Loan Pricing and Profit Margins: General Remarks
  - Credit Rationing
  - The Spot-Lending Decision
  - Long-Term Bank–Borrower Relationships
  - Loan Restructuring and Default
  - Conclusion
  - Case Study: Zeus Steel, Inc.
  - Review Questions
- Chapter 9: Special Topics in Credit: Syndicated Loans, Loan Sales, and Project Finance
  - Abstract
  - Glossary of Terms
  - Introduction
  - Syndicated Lending
  - Project Finance
  - Conclusion
  - Review Questions
Part V: Off the Bank’s Balance Sheet
- Chapter 10: Off-Balance Sheet Banking and Contingent Claims Products
  - Abstract
  - Glossary of Terms
  - Introduction
  - Loan Commitments: a Description
  - Rationale for Loan Commitments
  - Who is Able to Borrow Under Bank Loan Commitments?
  - Pricing of Loan Commitments
  - The Differences Between Loan Commitments and Put options
  - Loan Commitments and Monetary Policy
  - Other Contingent Claims: Letters of Credit
  - Other Contingent Claims: Swaps
  - Other Contingent Claims: Credit Derivatives
  - Risks for Banks in Contingent Claims
  - Regulatory Issues
  - Conclusion
  - Case Study: Youngstown Bank
  - Review Questions
- Chapter 11: Securitization
  - Abstract
  - Glossary of Terms
  - Introduction
  - Preliminary Remarks on the Economic Motivation for Securitization and Loan Sales
  - Different Types of Securitization Contracts
  - Going Beyond Preliminary Remarks on Economic Motivation: the “Why,” “What,” and “How Much is Enough” of Securitization
  - Strategic Issues for a Financial Institution Involved in Securitization
  - Comparison of Loan Sales and Loan Securitization
  - Conclusion
  - Case Study: Lone Star Bank
  - Review Questions
Part VI: The Funding of the Bank
- Chapter 12: The Deposit Contract, Deposit Insurance, and Shadow Banking
  - Abstract
  - Glossary of Terms
  - Introduction
  - The Deposit Contract
  - Liability Management
  - Deposit Insurance
  - The Great Deposit Insurance Debacle
  - Funding in the Shadow-Banking Sector
  - Conclusion
  - Review Questions
- Chapter 13: Bank Capital Structure
  - Abstract
  - Glossary of Terms
  - Introduction
  - Does the M&M Theorem Apply to Banks? Dispelling Some Fallacies
  - The Theories of Bank Capital Structure
  - Empirical Evidence on Bank Capital, Bank Lending, and Bank Value
  - Why Then do Banks Display a Preference for High Leverage?
  - Bank Capital and Regulation
  - Conclusion
  - Review Questions
Part VII: Financial Crises
- Chapter 14: The 2007–2009 Financial Crisis and Other Financial Crises
  - Abstract
  - Glossary of Terms
  - Introduction
  - What Happened
  - Cause and Effect: The Causes of the Crisis and its Real Effects
  - The Policy Responses to the Crisis
  - Financial Crises in Other Countries and Regulatory Interventions
  - Conclusion
Part VIII: Bank Regulation
- Chapter 15: Objectives of Bank Regulation
  - Abstract
  - Glossary of Terms
  - Introduction
  - The Essence of Bank Regulation
  - The Agencies of Bank Regulation
  - Safety and Soundness Regulation
  - Stability: Macroprudential Regulation
  - Market Structure, Consumer Protection, Credit Allocation, and Monetary Control Regulation
  - Conclusion
  - Review Questions
- Chapter 16: Milestones in Banking Legislation and Regulatory Reform
  - Abstract
  - Glossary of Terms
  - Introduction
  - Milestones of Banking Legislation
  - Problems of Bank Regulation
  - The 1991 FDICIA and Beyond
  - The Financial Services Modernization Act of 1999
  - The Dodd–Frank Wall Street Reform and Consumer Protection Act
  - EU Regulatory and Supervisory Overhaul and the De Larosière Report
  - Conclusion
  - Review Questions
  - Appendix
Part IX: Financial Innovation
- Chapter 17: The Evolution of Banks and Markets and the Role of Financial Innovation
  - Abstract
  - Glossary of Terms
  - Introduction
  - Financial Development
  - Financial Innovation
  - The Dark Side of Financial Innovation
  - Banks and Financial Markets
  - Bank Versus Market: Complementarities and Shadow Banking
  - Role of Credit-Rating Agencies
  - Conclusion
  - Review Questions
Part X: The Future
- Chapter 18: The Future
  - Abstract
  - Glossary of Terms
  - Introduction
  - Change Drivers
  - Initiatives that are Changing the Landscape
  - Are Banks Doomed?
  - Conclusion
Subject Index

Stuart I. Greenbaum

Stuart Greenbaum is a leading authority on banks. Formerly dean of the John M. Olin School of Business at Washington University in St. Louis, he spent twenty years at the Kellogg Graduate School of Management at Northwestern University, where he was the Director of the Banking Research Center and the Norman Strunk Distinguished Professor of Financial Institutions. Three times he was appointed to the Federal Savings and Loan Advisory Council and was twice officially commended for extraordinary public service. He is founding editor of the Journal of Financial Intermediation.

Affiliations and expertise

Bank of America Professor of Managerial Leadership and former Dean, John M. Olin School of Business, Washington University, St. Louis, MO, USA

Anjan V. Thakor

As the John E. Simon Professor of Finance and Senior Associate Dean of Programs at the Olin School of Business, Washington University, St. Louis, Anjan Thakor works in both academia and the business world. Prior to joining the Olin School, he was Edward J. Frey Professor of Banking and Finance at the Ross School of Business, University of Michigan, where he also served as chairman of the Finance area. He has worked with many companies, including Whirlpool Corporation, Allision Engine Co., Citigroup, RR Donnelley, Dana Corporation, Anheuser-Busch, Zenith Corporation, Lincoln National Corporation, and J.P. Morgan.

Affiliations and expertise

John E. Simon Professor of Finance and Director of the PhD Program, Olin School of Business, Washington University, St. Louis, MO, USA

Arnoud W. A. Boot

Arnoud Boot is professor of Corporate Finance and Financial Markets at the University of Amsterdam and chairman of the European Finance Association (EFA). He is chairman of the Bank Council of the Dutch Central Bank (DNB), member of the Scientific Council for Government Policy (WRR) and member of the Royal Netherlands Academy of Arts and Sciences (KNAW). He is also a research fellow at the Centre for Economic Policy Research (CEPR) in London. Prior to his current positions, he was a member of the Inaugural Advisory Committee of the European Systemic Risk Board (ESRB), partner in the Finance and Strategy Practice at McKinsey & Co. and a faculty member at the J.L. Kellogg Graduate School of Management at Northwestern University in Chicago. He was also Bertil Danielsson Visiting Professor at the Stockholm School of Economics and Olin Fellow at Cornell University. He is the past chairman of the Royal Netherlands Economics Association. In addition to his academic activities, Arnoud Boot advises extensively on ownership structure issues, particularly related to the public/private domain, and is consultant to several financial institutions and corporations. He is a non-executive director of several corporations and agencies. His research focuses on corporate finance and financial institutions. His publications have appeared in major academic journals, such as the Journal of Finance, American Economic Review, Review of Financial Studies, and the Journal of Financial Intermediation.

Affiliations and expertise

University of Amsterdam