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30 Pages • Complete Study Notes • Year: Pre-2018
Why do we need banks? • Asset transformation (From small money to big money) 4 Functions of a banking system • Transformations o Assets o Credit risk o Maturity o Liquidity Week 1 Reading (Essence of banking) • Public’s ex-ante demand for liquidity at par is greater than the public’s ex post demand • Banking systems exist because they can meet the ex-ante demand, but never have to pony up ex-post o D: Pony up – pay up • Two principles for existence of banks o 1. The genius of banking is maturity liquidity and quality transformation: holding assets that are longer, less liquid and of lower quality than the funding liabilities o 2. A banking system is solvent only if it is believed by the public to be going concern. To implement P.1, you need to P.2 otherwise bank run (Panic, no lender of last resort, no deposit insurance) Applies in both conventional and shadow banking • If what you’re doing is Banking = Joint venture with the public sector • If you engage in banking with potential to cause systemic risk, you require regulatory supervision and meet capital requirement. • Shadow Banking o Earn the net interest margin associated with maturity, liquidity and quality transformation of conventional banks, but without the regulatory burden of convention banks (E.g regulatory capital requirement) o To fund the assets Create information-insensitive liability through money market instruments such as repos and commercial paper • QUESTION
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