The Economics of Financial Intermediation

3 units

The structure and the role of banks have changed tremendously. The historically-traditional activity of granting loans and collecting deposits has evolved into a much richer and more complex set of financial contracts. The separation between financial asset trading activity and traditional commercial bank activity that was typical of the financial system in the period after the World War II also disappeared. Coincident with the evolution of financial institutions was the development of the asymmetric information model. The role of banks in the economy can be explained with the tools developed in these models of the economics of information, as a microeconomic theory of banking does not exist when information is symmetric and markets are complete. The economics of information literature is also used to explain the evolution of financial institutions and markets, and to understand the consequences of that evolution for economic outcomes (such as economic development and financial crises) and for monetary policy choices (such as central bank interventions, regulations and changes in the payments system).