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• Dedication
• Contemporary Financial Intermediation
• Copyright Page
• Abbreviated Contents
• Extended Contents
• Preface
• Acknowledgments
• About the Authors
• Introduction
• I. The Background
• 1. Basic Concepts
• Introduction
• Risk Preferences
• Diversification
• Riskless Arbitrage
• Options
• Market Efficiency
• Market Completeness
• Asymmetric Information and Signaling
• Agency and Moral Hazard
• Time Consistency
• Nash Equilibrium
• Revision of Beliefs and Bayes Rule
• Liquidity
• Systemic Risk
• Disagreement
• Mark-to-Market Accounting
• II. What is Financial Intermediation?
• 2. The Nature and Variety of Financial Intermediation
• Introduction
• What are Financial Intermediaries?
• The Variety of Financial Intermediaries
• Depository Financial Intermediaries
• Investment Banks: Key Nondepository Intermediaries in the Capital Market
• Separation Between Investment Banks and Commercial Banks Undone
• Other Nondepository Intermediaries
• Credit Rating Agencies
• The Role of the Government
• Financial Intermediaries on the Periphery
• Conclusion
• Review Questions
• Appendix 2.1 Measurement Distortions and the Balance Sheet
• 3. The What, How, and Why of Financial Intermediaries
• Introduction
• How Does the Financial System Work?
• Business Financing: Debt
• Fractional Reserve Banking and the Goldsmith Anecdote
• A Model of Banks and Regulation
• The Macroeconomic Implications of Fractional Reserve Banking: The Fixed Coefficient Model
• Large Financial Intermediaries
• How Banks can Help to Make Nonbank Financial Contracting More Efficient
• The Empirical Evidence: Banks are Special
• Ownership Structure of Depository Financial Institutions
• The Borrower’s Choice of Finance Source
• Conclusion
• Review Questions
• Appendix 3.1 The Formal Analysis of Large Intermediaries
• Appendix 3.2 Definitions
• III. Identification and Management of Major Banking Risks
• 4. Bank Risks
• Introduction
• Basic Banking Risks
• Credit, Interest Rate, and Liquidity Risks
• Enterprise Risk Management
• Conclusion
• Review Questions
• 5. Interest Rate Risk
• Introduction
• The Term Structure of Interest Rates
• The Lure of Interest Rate Risk and Its Potential Impact
• Duration
• Convexity
• Interest Rate Risk
• Conclusion
• Case Study: Eggleston State Bank
• 6. Liquidity Risk
• Introduction
• What, After All, is Liquidity Risk?
• Some Formal Definitions of Liquidity
• The Management of Liquidity Risk
• The Difficulty of Distinguishing Between Liquidity and Insolvency Risks and the LLR’s Conundrum
• Conclusion
• Review Questions
• Appendix 6.1 Dissipation of Withdrawal Risk Through Diversification
• Appendix 6.2 Lender-of-Last-Resort Moral Hazard
• IV. “On Balance Sheet” Banking Activities
• 7. Spot Lending and Credit Risk
• Introduction
• Description of Bank Assets
• What is Lending?
• Loans Versus Securities
• Structure of Loan Agreements
• Informational Problems in Loan Contracts and the Importance of Loan Performance
• Credit Analysis: The Factors
• Sources of Credit Information
• Analysis of Financial Statements
• Loan Covenants
• Conclusion
• Case Study: Indiana Building Supplies, Inc.
• Review Questions
• 8. Further Issues in Bank Lending
• Introduction
• Loan Pricing and Profit Margins: General Remarks
• Credit Rationing
• The Spot-Lending Decision
• Long-Term Bank–Borrower Relationships
• Loan Restructuring and Default
• Conclusion
• Case Study: Zeus Steel, Inc.
• Review Questions
• 9. Special Topics in Credit: Syndicated Loans, Loan Sales, and Project Finance
• Introduction
• Syndicated Lending
• Project Finance
• Conclusion
• Review Questions
• V. Off the Bank’s Balance Sheet
• 10. Off-Balance Sheet Banking and Contingent Claims Products
• Introduction
• Loan Commitments: A Description
• Rationale for Loan Commitments
• Who is Able to Borrow Under Bank Loan Commitments?
• Pricing of Loan Commitments
• The Differences Between Loan Commitments and Put Options
• Loan Commitments and Monetary Policy
• Other Contingent Claims: Letters of Credit
• Other Contingent Claims: Swaps
• Other Contingent Claims: Credit Derivatives
• Risks for Banks in Contingent Claims
• Regulatory Issues
• Conclusion
• Case Study: Youngstown Bank
• Review Questions
• 11. Securitization
• Introduction
• Preliminary Remarks on the Economic Motivation for Securitization and Loan Sales
• Different Types of Securitization Contracts
• Going Beyond Preliminary Remarks on Economic Motivation: the “Why,” “What,” and “How Much is Enough”
• Strategic Issues for a Financial Institution Involved in Securitization
• Comparison of Loan Sales and Loan Securitization
• Conclusion
• Case Study: Lone Star Bank
• Review Questions
• VI. The Funding of the Bank
• 12. The Deposit Contract, Deposit Insurance, and Shadow Banking
• Introduction
• The Deposit Contract
• Liability Management
• Deposit Insurance
• The Great Deposit Insurance Debacle
• Funding in the Shadow-Banking Sector
• Conclusion
• Review Questions
• 13. Bank Capital Structure
• Introduction
• Does the M&M Theorem Apply to Banks? Dispelling Some Fallacies
• The Theories of Bank Capital Structure
• Empirical Evidence on Bank Capital, Bank Lending, and Bank Value
• Why Then Do Banks Display a Preference for High Leverage?
• Bank Capital and Regulation
• Conclusion
• Review Questions
• VII. Financial Crises
• 14. The 2007–2009 Financial Crisis and Other Financial Crises
• Introduction
• What Happened
• Cause and Effect: The Causes of the Crisis and its Real Effects
• The Policy Responses to the Crisis
• Financial Crises in Other Countries and Regulatory Interventions
• Conclusion
• VIII. Bank Regulation
• 15. Objectives of Bank Regulation
• Introduction
• The Essence of Bank Regulation
• The Agencies of Bank Regulation
• Safety and Soundness Regulation
• Stability: Macroprudential Regulation
• Market Structure, Consumer Protection, Credit Allocation, and Monetary Control Regulation
• Conclusion
• Review Questions
• 16. Milestones in Banking Legislation and Regulatory Reform
• Introduction
• Milestones of Banking Legislation
• Problems of Bank Regulation
• The 1991 FDICIA and Beyond
• The Financial Services Modernization Act of 1999
• The Dodd–Frank Wall Street Reform and Consumer Protection Act
• EU Regulatory and Supervisory Overhaul and the De Larosière Report
• Conclusion
• Review Questions
• Appendix
• IX. Financial Innovation
• 17. The Evolution of Banks and Markets and the Role of Financial Innovation
• Introduction
• Financial Development
• Financial Innovation
• The Dark Side of Financial Innovation
• Banks and Financial Markets
• Bank Versus Market: Complementarities and Shadow Banking
• Role of Credit-Rating Agencies
• Conclusion
• Review Questions
• X. The Future
• 18. The Future
• Introduction
• Change Drivers
• Initiatives that are Changing the Landscape
• Are Banks Doomed?
• Conclusion
• Subject Index
• Back Cover