International Banking Mid Semester Study Notes - Weeks 1 - 4

1 Found helpful • 30 Pages • Complete Study Notes • Year: Pre-2021

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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