Chapter 3
Review Questions
200643236
Bussiness/Shin Meaung Suk(신명석)
Blog Address : Cyworld.co.kr/marketwizard
Marketwizard.tistory.com
1. Explain how a bank evolves from a primitive goldsmith and the roles played by asymmetric information and moral hazard in this evolution.
1) First, Primitive gold smith's function is not only as gold safe or ware house but also issuing paper money or reciept. That time amount of gold deposit is same as that of reciept. The gold smith's was a simple business. Like the furniture ware house, the gold smith provided safe keeping service for a fee.
The ware house receipt passes from the buyer to the seller, and the only purpose served by the two trips is to test the goldsmith's integrity.
For his reputation and history, He think that issuing more reciepts than on had gold, but if no one ever withdraws the gold, then what possible harm? The naughty possibility of printing extra ware house receipts changed the world.
2) By the extra reciepts were loaned to borrowers and earned interest, the gold smith is providing a key liquidity transformation service by issuing liquid claims to depositors that are backed by illiquid loans to merchants. Whatever this self-imposed limit,however,the introduction of the central bank acting as a lender of last resort will weaken the gold smith's restraint. If the gold smith knows that he can borrow against his otherwise illiquid loans, he will make more loans that if he could not use the loans as collateral. Thus, the contral bank introduces a kind of the moral hazard and this moral hazard is typically addressed by imposing cash asset reserve requirements that effectively limit the volume of a bank's lending on the basis of its cash assets.
2. Can banking ever become completely deregulated? Why or why not?
I agree that bank should be deregulated. But I don't want to be completely deregulated.As money has distinction that following or seeking the profitable place,The bank need to invest or loan for more profit by deregulating.On the other hand,Fedral Reserve Bank or lender of the last resort has to execute for redistribution of wealth and prevent bank from moral hazard.So, the last resort lender should effect bank tax bout profit from high risk investment such as junk bond or Credit Defualt Swap deal.
3. What do we mean by a "hierarchy of financing sources"? What determines a borrower's choice of financing source?
Finanlly, there is a natural hierarchy of financing sources. In its earliest phases of development, a firm has the greatest advantage in seeking venture capital, due to the speacial ability ofr the venture capitalist to assist in management. At the next stage, when early survival has been accomplished, bank loans are preferred. Although banks do not assist in management to the extent that venture capitalists do, the monitoring provided by banks is of value to firms at this stage when they are still relatively small or medium-sized. Bank monitoring helps to control incentive problems within the borrowing firm.
4. Can you shed light on the following facts and explain their possible interrelatioship ?
There are trends on closed firms head to securitization or capitalization by IPO,or Initial Public Offering. And bank is acting like honest investor. Bank loans as the dominant for small firms.
5. What is the difference between a "stock" and a "mutual"? Explain the differences in the resolutions of agency problems for these two types of organiztions.
In a stock S&L, shareholders have a well-defined ownership right, which implies 1)a claim to free cash flow profits or residual profits, 2) a right to vote for the board of directors and change control of the organization, and 3) a right to dissolve the organization. On the other hand, in a mutual S&L, the ownership rights of depositors are much weaker. As for 1) depositors in a mutual are much more like creditors than shareholders since they cannot fore the mutual to pay them more than the promised interest and principal on their claims. As for 2) while mutual S&L depositors have voting rights, these are quite limited and are often signed over to management at the time of opening of accounts. Finally, as for 3) even though a depositor can withdraw his deposits and thereby partially liquidate the mutual fund, depositors have had little incentive to do so because of deposit insurance,especially, when interest rate ceilings bounded the return to depositors.
6. It has been said that the health of a nation's banking system is inveresely related to the speed and efficiency of information flows in the economy. Explain.
As incresing the speed and effiency of information flows in the economy, the capital market becom "Red Ocean", It is hard to make the money. So, nation's bank system is eager to make a profit but they are not easy to make the money. In view of EMH(Efficienct Market Hypothesis). There are little profitable asset. The assts are taken by immediately and fully market operating.So, nation banking system undertake the hard task.
7. In what way are anks "unique"? What is the emprirical evidence on this issue?
Banks are special, If bank loans to firm, the firm take a positive effect. and the return of stock pices is supior to market's index.
8. What are the economic incentives for financial intermediaries to grow large?
If financial intermediaries become large, It is suffient to find the client's credit or easy to make a profit by diversification. In brokerage, large FI reduce the number of free rider who is take a adventage by asymmetric information. In Asset Transformation, many depositor is risk averse. the bank can do this by diversifying its risk across many different borrowers. and, because the benefit of diversification keeps growing with size, the bank is a natural monopoly.
9. How do banks help to make nonbank contracting more efficient?
If the bank renews a borrower's loan, it sends a positive signal about the firm to its other creditors. Because, bank invest basedon inside debt. Note that credibility of this signal derives from the fact that the bank "puts its money where its mouth is"when it renews the loan. Given this credible and positive signal, other higher-priority creditors find it unnecessary to expend their own resources to duplicate the bank's evaltuation. Thust, bank loans help to reduce duplication in borrower evalutaion by multiple creditors.
10. Given below is an excerpt from "A Friendly Conversation." Comment critically on it.
Appleton's think is first cule to make moral hazard. Because, Banker think that the lender of last resort is always help us.This think is encourage to invest in high risk/high return asset not liquid. Finally, Banker use the last resort leander in badly but they are to be more rich. And Bankrun,bank cannot afford to give money by deposit withdraw,occurs more frequently.
11. How does monetary policy affect the (short-term) growth path of an economy?
There are three type of monetary poicy. First, Open market operation. this means that the initial open market operation of purchasing Treasuries leads to and increase in lending by banks. Think easy, If the Central bank pruchasing Treasuries, the lending market get a liquidty,money. So, lending market increase money for lending. Second, Central bank adjust reserve requirements and discount rate. Reserve requirements will reduce the amount of deposits available for lending, and any reduction in reserve requirements will increase the amount of deposits available for lending. And discount rate charged by the central banks to member banks for short-term borrowings from the central bank, also affects monetary expansion/ contraction. By raising the discount rate, the Fed makes it more costly for banks to borrow and build up reserves, and therefore effectively reduces the reserves availabe to banks. This reduces lending.
12. What are the differences between transaction and relationship loans and what is the releveance of the distintion?
Thus, bank loans span a continuum from relationship loans at one end to transaction loans at the other. Relationship loans are the most different from capital market financing. Transaction loans are the most similar to capital market financing.
