Financial Intermediation, Monetary Uncertainty and Bank Interest Margins

Authors

  • Leonardo Hernández Escuela de Administración, Universidad Católica de Chile

Keywords:

financial intermediation, interest margin, monetary uncertainty, lending-borrowing spread, monetary policy, bank credit

Abstract

This paper studies a simple model of financial intermediation in order to understand how the lending-borrowing spread (or interest margin) charged by financial intermediaries is determined in equilibrium in a monetary economy. The main conclusion of the paper concerns the effect on the spread of changes in the distribution of monetary innovations. Thus, changes in the monetary-policy-rule followed by the Central Bank which alter the volatility of inflation will have important effects on the interest-margin and also on the amount of credit available to investors. A cross-section empirical analysis strongly supports our hypothesis.

Downloads

Download data is not yet available.

References

Baltensperger, E. (1972). Costs of banking activities: Interactions between risk and operating costs. Journal of Money, Credit and Banking, 4(3), 595–611.

Baltensperger, E. (1980). Alternative approaches to the theory of the banking firm. Journal of Monetary Economics, 6(1), 1–37. https://doi.org/10.1016/0304-3932(80)90016-1

Bernanke, B., & Gertler, M. (1989). Agency costs, net worth, and business fluctuations. American Economic Review, 79(1), 14–31.

Boyd, J. H., & Prescott, E. C. (1986). Financial intermediary-coalitions. Journal of Economic Theory, 38(2), 211–232.

Campbell, T. S., & Kracaw, W. A. (1980). Information production, market signalling, and the theory of financial intermediation. Journal of Finance, 35(4), 863–882.

Deshmukh, S. D., Greenbaum, S. I., & Kanatas, G. (1983). Interest rate uncertainty and the financial intermediary's choice of exposure. Journal of Finance, 38(1), 141–147.

Diamond, D. W. (1984). Financial intermediation and delegated monitoring. Review of Economic Studies, 51(3), 393–414. https://doi.org/10.2307/2297430

Diamond, D. W., & Dybvig, P. (1983). Bank runs, deposit insurance and liquidity. Journal of Political Economy, 91(3), 401–419.

Edwards, S. (1988). El monetarismo en Chile, 1973-1983: Algunos dilemas económicos. In F. Morandé & K. Schmidt-Hebbel (Eds.), Del auge a la crisis de 1982. ILADES-Georgetown University.

Gertler, M. (1988). Financial structure and aggregate economic activity: An overview. Journal of Money, Credit and Banking, 20(3), 559–588.

Giovannini, A. (1989). Uncertainty and liquidity. Journal of Monetary Economics, 23(2), 239–258. https://doi.org/10.1016/0304-3932(89)90050-0

Greenwood, J., & Williamson, S. (1989). International financial intermediation and aggregate fluctuations under alternative exchange rate regimes. Journal of Monetary Economics, 23(3), 401–431.

Hernández, L. (1990). Inflación y retorno bursátil: Una investigación empírica, Chile 1960-1988. Cuadernos de Economía, 27(82), 381–406.

Ho, T. S. Y., & Saunders, A. (1981). The determinants of bank interest margins: Theory and empirical evidence. Journal of Financial and Quantitative Analysis, 16(4), 581–600. https://doi.org/10.2307/2330377

Jaffee, D. M., & Modigliani, F. (1969). A theory and test of credit rationing. American Economic Review, 59(5), 850–872.

Jaffee, D. M., & Russell, T. (1976). Imperfect information, uncertainty, and credit rationing. Quarterly Journal of Economics, 90(4), 651–666. https://doi.org/10.2307/1885327

Johnson, S. (1988). High inflation, low deflation and disintermediation: Do banks really matter? [Mimeo]. Massachusetts Institute of Technology.

Klein, M. A. (1971). A theory of the banking firm. Journal of Money, Credit and Banking, 3(2), 205–218.

Poole, W. (1968). Commercial bank reserve management in a stochastic model: Implications for monetary policy. Journal of Finance, 23(5), 769–791. https://doi.org/10.2307/2325906

Pyle, D. H. (1971). On the theory of financial intermediation. Journal of Finance, 26(3), 737–747. https://doi.org/10.1111/j.1540-6261.1971.tb01727.x

Pyle, D. H. (1972). Descriptive theories of financial institutions under uncertainty. Journal of Financial and Quantitative Analysis, 7(5), 2009–2029.

Ramakrishnan, R. T. S., & Thakor, A. V. (1984). Information reliability and a theory of financial intermediation. Review of Economic Studies, 51(3), 415–432. https://doi.org/10.2307/2297431

Ramos, J. (1988). Auge y caída de los mercados de capitales en Chile: 1975-1983. In F. Morandé & K. Schmidt-Hebbel (Eds.), Del auge a la crisis de 1982. ILADES-Georgetown University.

Rothschild, M., & Stiglitz, J. E. (1970). Increasing risk: I. A definition. Journal of Economic Theory, 2(3), 225–243.

Santomero, A. M. (1984). Modeling the banking firm: A survey. Journal of Money, Credit and Banking, 16(4), 576–602.

Sealey, C. W. (1980). Deposit rate setting, risk aversion, and the theory of depository financial intermediaries. Journal of Finance, 35(5), 1139–1154. https://doi.org/10.2307/2327090

Sjaastad, L. A. (1983). Failure of economic liberalism in the Cone of Latin America. World Economy, 6(1), 5–26. https://doi.org/10.1111/j.1467-9701.1983.tb00033.x

Slovin, M. B., & Sushka, M. E. (1983). A model of the commercial loan rate. Journal of Finance, 38(5), 1583–1596. https://doi.org/10.2307/2327588

Stiglitz, J. E., & Weiss, A. (1981). Credit rationing in markets with imperfect information. American Economic Review, 71(3), 393–410.

Stiglitz, J. E., & Weiss, A. (1983). Incentive effects of terminations: Applications to the credit and labor markets. American Economic Review, 73(5), 912–927.

Townsend, R. M. (1979). Optimal contracts and competitive markets with costly state verification. Journal of Economic Theory, 21(2), 265–293. https://doi.org/10.1016/0022-0531(79)90031-0

Townsend, R. M. (1983). Financial structure and economic activity. American Economic Review, 73(5), 895–911.

Williamson, S. D. (1986). Costly monitoring, financial intermediation, and equilibrium credit rationing. Journal of Monetary Economics, 18(2), 159–179. https://doi.org/10.1016/0304-3932(86)90074-7

Williamson, S. D. (1987a). Costly monitoring, loan contracts, and equilibrium credit rationing. Quarterly Journal of Economics, 102(1), 135–145. https://doi.org/10.2307/1884684

Williamson, S. D. (1987b). Financial intermediation, business failures, and real business cycles. Journal of Political Economy, 95(6), 1196–1216.

Williamson, S. D. (1987c). Transactions costs, inflation, and the variety of intermediation services. Journal of Money, Credit and Banking, 19(4), 484–498.

Williamson, S. D. (1988). Liquidity, banking, and bank failures. International Economic Review, 29(1), 25–43. https://doi.org/10.2307/2526805

Williamson, S. D. (1989). Restrictions on financial intermediaries and implications for aggregate fluctuations: Canada and the United States, 1870-1913 (Research Department Staff Report N.º 119). Federal Reserve Bank of Minneapolis.

Downloads

Published

1992-10-31

How to Cite

Hernández, L. (1992). Financial Intermediation, Monetary Uncertainty and Bank Interest Margins. Economic Analysis Review, 7(2), 23–42. Retrieved from https://www.rae-ear.org/index.php/rae/article/view/227

Issue

Vol. 7 No. 2 (1992)

Section

Articles

License

Copyright (c) 1992 Leonardo Hernández

Creative Commons License

This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Article usage

ViewsTimes this article's page was opened since the journal started recording statistics. One person can visit more than once.
153
DownloadsTimes the full text of this article (usually the PDF) was opened or downloaded.
198

All time, as recorded by the journal.

Last 2 years: 53 views, 105 downloads.

1.29 downloads per view (journal average 1.65).Downloads of the full text for every abstract view of this article, compared with the whole journal.

Explore the journal's metrics