1 / 19

Chapter 17: Learning Objectives

Chapter 17: Learning Objectives. Theories of the Banking Firm: Multiple deposit expansion A graphical exposition and some applications GAP & Duration Analysis The Principal-Agent View. A Simplified Balance Sheet. Liabilities. Assets. DEP= Deposits ADV= Bank of Canada Advances.

galena
Download Presentation

Chapter 17: Learning Objectives

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Chapter 17:Learning Objectives • Theories of the Banking Firm: • Multiple deposit expansion • A graphical exposition and some applications • GAP & Duration Analysis • The Principal-Agent View

  2. A Simplified Balance Sheet Liabilities Assets DEP=Deposits ADV=Bank of Canada Advances CUR=Cash RES=Target reserves L=Loans SEC= Securities

  3. Multiple Expansion of Deposits: The Basics

  4. Multiple Deposit Expansion • Based on the assumption of a reserve requirement. No longer formally exists in Canada BUT banks need to keep reserves • Reserve target and Excess reserves: the starting point of the multiple expansion approach • A Banking system with a single bank vs. multiple banks: does it make a difference? Not really. • Initial assumptions: • banks maintain target reserves at all times • there are no “cash drains” in the banking system

  5. The Deposit Multiplier • The basic theory predicts that inflows or outflows of funds lead to deposits in the banking system to rise or fall by a multiple of the original change • The basic theory also has implications for changes in the money supply which is linked to CUR and DEP

  6. Multiple Deposit Expansion:The Basics M1=money supply=CUR+DEP RES=rr • DEP, where rr= target reserve ratio rr is FIXED  DEP = (1/rr) • RES  A more flexible model DEP = (1/(rr+er(R)) • RES Where er=excess reserve ratio

  7. Multiple Deposit Expansion: Examples • Effect of a currency drain  reduces multiplier • Effect of a change in the composition of deposits  different deposits may have different target reserves which also can affect the multiplier [TABLE 17.3] • Transfer of deposits among different types of financial institutions can affect multiplier if, for regulatory or other reasons, target reserves differ across institution types [TABLE 17.4]

  8. Deposit expansion: Change in deposit composition

  9. Impact of shift between bank and near bank

  10. A Simple Theory of the Banking Firm • Assumes there is a behavioural relationship between DEP and other economic variables such as interest rates, income and wealth  EQUATION 17.10 • Assumes that the objective of the banking firm is to maximize profits MR=MC is the required condition FIGURE 17.1 • Profits are the difference between Revenues and Costs which are assumed, for simplicity, to be a function of Deposits, asset returns and deposit costs  EQUATION 17.13

  11. MCDEP Interest rate ACDEP Ra Spread ARDEP RDEP MRDEP Deposits DEP* Figure 17.1. Profit Maximization of the Banking Firm

  12. Applications of the Banking Firm Model • Helps explain the spread and its link to the degree of “competitiveness” in the financial sector [FIGURE 17.2] • Helps explain how the banking firm reacts to changing costs or technological developments • Is more useful as a pedagogical device than in practice

  13. MC Interest rate R’a AC • • • R*a • 1 Ra† MR†=AR† 3 (Competitive Case) 4 • R+DEP • AR R*DEP • • R’DEP 2 R’DEP MR(Monopoly power Case) Deposits DEP’ DEP* DEP† Figure 17.2. The Impact of Government Regulations on the Market for Deposits

  14. A More Practical Alternative:GAP and Duration Analysis • Not all assets / liabilities are equally sensitive to interest rate changes • Profitability in the short-run will be a function of changes in the “value” of those components in the balance sheet which are sensitive to interest rates  GAP= IRSA - IRSL • Not all assets / liabilities have the same term to maturity. This can affect the “price” of balance sheet items  DURATION and duration GAP concepts  dur GAP= durA (A/L) - durL

  15. GAP Analysis: Numerical Example

  16. Duration Analysis: The Basic formulas Stream of income is written P= $X1/ (1+R) + $X2 / (1+R)2 +…+ $Xn/(1+R)n Duration = A weighted average (weights are years before income is received) as a percent of the price of the asset Or Dur = 1 [$X1/(1+R)]/P + 2 [$X2/(1+R)2]/P +…+n [$Xn/(1+R)n]/P

  17. The Principal - Agent Approach to the Banking Firm • Banks are typically owned by Shareholders and run by Managers • The two groups may have conflicting objectives • shareholders want to maximize the stream of dividends • managers may wish to maximize their income, perks • Table 17.6: a numerical example • If we think of the relationship between the two groups are a “game” we can develop policies to ensure that the banking firm’s profits are maximized

  18. Principal-Agent Problem:Ilustration

  19. Summary • Understanding the behaviour of banks can be accomplished in a number of ways: • multiple expansion of deposits approach • the theory of the banking firm approach • GAP and DURATION analysis • Principal-Agent approach • Each theory focuses on different aspects of banking firm behaviour

More Related