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Contents

Preface xi Chapter 1 : Trends in Domestic and International Banking 1 1.1 Introduction 1 1.2 Deregulation 3 1.3 Financial Innovation 4 1.4 Globalization 6 1.5 Profitability 8 1.6 The Future 16 1.7 Conclusion 19 1.8 Summary 19 Questions 20 Test Questions 21 Chapter 2 : Financial Intermediation: The Impact of the Capital Market 23 2.1 Introduction 23 2.2 The Role of the Capital Market 24 2.3 Determination of the Market Rate of Interest 30 2.4 Summary 34 Questions 35 Test Questions 35 Chapter 3 : Banks and Financial Intermediation 37 3.1 Introduction 37 3.2 Different Requirements of Borrowers and Lenders 38 3.3 Transaction Costs 40 3.4 Liquidity Insurance 43 3.5 Asymmetry of Information 46 3.6 Operation of the Payments Mechanism 51 3.7 Direct Borrowing from the Capital Market 51 3.8 Conclusion 52 3.9 Summary 53 Questions 53 Test Questions 53 Chapter 4 : Banking Typology 55 4.1 Introduction 55 4.2 General Features of Banking 56 4.3 Retail Banking 59 4.4 Wholesale Banking 61 4.5 Universal Banking 63 4.6 Islamic Banking 64 4.7 Microfinance 66 4.8 Shadow Banking 68 4.9 Summary 70 Questions 70 Test Questions 70 Chapter 5 : International Banking 71 5.1 Introduction 71 5.2 The Nature of International Banking 72 5.3 Growth of International Banking 75 5.4 The Eurocurrency Markets 77 5.5 Summary 84 Questions 84 Test Questions 85 Chapter 6 : The Theory of the Banking Firm 87 6.1 Introduction 87 6.2 The Textbook Model 88 6.3 The Perfectly Competitive Bank 90 6.4 The Monopoly Bank 92 6.5 The Imperfect Competition Model 97 6.6 Summary 100 Questions 100 Test Questions 101 Chapter 7 : Models of Banking Behaviour 103 7.1 Introduction 103 7.2 The Economics of Asset and Liability Management 104 7.3 Liquidity Management 104 7.4 Loan Pricing 109 7.5 Asset Management 112 7.6 The Real Resource Model of Asset and Liability Management 118 7.7 Liability Management and Interest Rate Determination 120 7.8 Summary 123 Questions 124 Test Questions 124 Chapter 8 : Credit Rationing 125 8.1 Introduction 125 8.2 The Availability Doctrine 126 8.3 Theories of Credit Rationing 127 8.4 Asymmetric Information and Adverse Selection 129 8.5 Adverse Incentive 130 8.6 Screening versus Rationing 133 8.7 Empirical Evidence 135 8.8 The Existence of Credit Rationing 136 8.9 Summary 139 Questions 140 Test Questions 140 Chapter 9 : Securitization 141 9.1 Introduction 141 9.2 Sales of Securities through Financial Markets 144 9.3 Asset-Backed Securitization (ABS) 146 9.4 The Process of Asset-Backed Securitization 147 9.5 The Gains from Asset-Backed Securitization 148 9.6 Conclusions 155 9.7 Summary 155 Questions 155 Test Questions 156 Chapter 10 : Banking Efficiency and the Structure of Banking 157 10.1 Introduction 157 10.2 Measurement of Output 157 10.3 Performance Measures 159 10.4 Reasons for the Growth of Mergers and Acquisitions 169 10.5 Motives for Mergers 172 10.6 Empirical Evidence 173 10.7 Summary 179 Questions 180 Test Questions 180 Chapter 11 : Banking Competition 181 11.1 Introduction 181 11.2 Concentration in Banking Markets 182 11.3 Structure-Conduct-Performance 184 11.4 Competition Analysis 186 11.5 Competition in the UK Banking Market 192 11.6 Summary 198 Questions 198 Test Questions 199 Chapter 12 : Bank Regulation 201 12.1 Introduction 201 12.2 The Case for Regulation 202 12.3 The Case against Regulation 209 12.4 Regulation 215 12.5 Summary 228 Questions 228 Test Questions 228 Chapter 13 : Banks and Money Laundering 229 13.1 Introduction 229 13.2 Scale, Scope and Typology 230 13.3 Microeconomics of Money Laundering 235 13.4 Macroeconomics of Money Laundering 241 13.5 Combating Money Laundering 242 13.6 Summary 244 Questions 245 Test Questions 245 Chapter 14 : Risk Management 247 14.1 Introduction 247 14.2 Risk Typology 248 14.3 Interest Rate Risk Management 250 14.4 Market Risk 260 14.5 Credit Risk 270 14.6 Operational Risk 279 14.7 Risk Management and the Global Banking Crisis 279 14.8 Conclusion 283 14.9 Summary 284 Questions 284 Test Questions 285 Chapter 15 : The Macroeconomics of Banking 287 15.1 Introduction 287 15.2 The Economics of Central Banking 288 15.3 Financial Innovation and Monetary Policy 297 15.4 Bank Credit and the Transmission Mechanism 302 15.5 Summary 309 Questions 309 Test Questions 310 References 311 Index 323

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