Topic Why do banks exist?Use two theories of financial intermediation to explain the existence and role of banks. Critically discuss and compare the two theories. Refer to at least two journal papers in your coursework. Suggested reading: Allen, F. and Santomero, A.M. (1997)The theory of financial intermediation.Journal of Banking and Finance. 21(11/12). pp. 1461–485. Benston, G. and Smith, C.W. (1976)A transaction cost approach to the theory of financial intermediation.Journal of Finance. 31(2). pp. 215−31. Bhattacharya, S. and Thakor, A.V. (1993) Contemporary banking theory.Journal of Financial Intermediation. 3(1). pp. 2–50; Sections 1, 2, 4, 5 and 7. Campbell, T.S. and Kracaw, W.A.(1980) Information Production, Market Signalling, and the Theory of Financial Intermediation. The Journal of Finance. 35(4).pp. 863-882. Diamond, D.W. (2007) Banks and liquidity creation: A simple exposition of the Diamond and Dybvig model. Federal Reserve Bank of Richmond Economic Quarterly. 93(2). pp.189−200. Diamond, D.W. (1984) Financial intermediation and delegated monitoring.Review of Economic Studies. 51(3). pp.728−62. Diamond, D.W. (1996) Financial intermediation as delegated monitoring: a simple example. Federal Reserve Bank of Richmond Economic Quarterly. 82(3). pp.51–66. Diamond, D.W. and Dybvig, P. (1983) Bank runs, deposit insurance and liquidity.Journal of Political Economy. 91(3). pp.401−19. Leland, H.E. and Pyle, D.H. (1977) Informational asymmetries, financial structure and financial intermediation. Journal of Finance. 32(2). pp.371−87. Levine, R. Loayza, N. and Beck, T.(2000) Financial intermediary development and economic growth: causality and causes. Journal of Monetary Economics. 46. pp. 31-77. Matthews, K. and Thompson, J. (2008)The Economics of Banking. Second edition, Chichester: Wiley, Ch. 3. Mitchell, J.(2004) Financial intermediation theory and the sources of value in structured finance markets. National Bank of Belgium. Ramakrishnan, R.T.S. and Thakor, A.V. (1984) Information reliability and a theory of financial intermediation. The Review of Economic Studies. 51(3). pp. 415-432. Saunders, A. and Cornett, M.M. (2014) Financial institutions: a risk management approach. International Edition. McGraw-Hill, Ch. 1. Scholtens, B. and van Wensveen, D. (2000) A critique on the theory of financial intermediation.Journal of Banking and Finance. 24(8). pp.1243–251.
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