Economie Bancaire

Professor Dhafer Saidane Summary by Muhammad Naveed Tahir M2 Research GATE Lyon 2 11 April 2009 Chapter 1 : Problems methods and challanges of the banking system Chapter 2 : The behaviour of the banking rm Chapter 3 : The eciency of the baning rm.

Bank is a nancial institution that takes deposits and advances loans . It pays interest rate to the depositors and charges from the borrower, the spread between the two is its prot ( of course after deduction of other administrative and operating costs) . Thus the core activity is to act as intermediaries between depositors and borrowers. Why do we need intermediaries, what are the reasons of existence of banks ? The rst reason is scale economies, as the cost of nding a potential borrower or lender is very high for an individual a bank may be able to achieve scale economies of the transaction cost . The second reason is scope of economies, unlike the individual lender bank enjoys information economies of scope in lending decission because of access to priveliged information on current and potantial borrowers. The second core activity of the banking system is to oer liquidity to their customers.Banks ensure that a check of the depositor is not refused and the demand for loan from a genuine borrower is not turned down just because of unavailability of liquidity. So banks keep the wheel of economy going smoothly through good payment system. Liquidity is therefore an important service that banks oer to their customers. Are banks special rms or put it this way how banks are dierent from other business rms ? The banks are unique because they are the custodian of public money. As the loss of the bank has not solely hit on the balance sheet of the bank rather it translates its vampire impacts on the depositors and the economy. This makes essential that proper regulations are in place. Secondly, banks are special in terms of macroeconomic impact as they set the transmission mechanism of monetary policy. So there very existence makes the role of central banks easier so for as eectiveness of monetary policy is concerned.Beside this, thier process of lending creates money. The other distinguishing feature of a banking rm from the other rms is its contagion eect. The faliure of one banking rm is not equivalent to the failure of a non-banking rm. So a banking rm is dierent from a non-banking one. So for as empirical models in compitition in banking are concerned there is SCP (Structure-conduct-performance) The relative eciency hypothesis. SCP says a change in the market structure or concentration of banking rms aect the way banks bahave and perform.The higher the market concentration,the higher the market power banks enjoy, which mean they can be inecient (avoid minimising cost) without being forced out of the market. Structure is market structure, determined by the cost(supply) and demand in a particular industry. Conduct is a function of numbers of sellers and buyersn, barriers to entry and Performance the banks conduct is its performance that is often measured by the protibility. The link between three might works is Structure Conduct(higerprices) P erf ormance(higherprof its) The second model is Relative eciency Hypothesis, this model challenges the SCP model and posit that some rms earn supernormal prot because they are more ecient than others. This frim specic eciency is exogenous. Greater eciency may be well reected in greater output. Under the relative eciency hypothesis, causation runs from greater eciency, lower prices and higher concentration/market share : 1

Eciency Conduct( Higer output and/or lower prices) Market Share P erf ormance(Higer Prots) So for as banking theory is concerned according to text book model banking sector is a passive agent in the monetary transmission mechanism.This view is because of money multiplier approach to the determination of money supply. The second approach is perfectly competitive bank, in this approach the banks objective is to maximise the prot. = L L CL (1)

Then comes the turn of regulation of banking system .Economists are divided on the need for regulation of banks . Bhattacharya et al ( 1998) argue that it is the existence of deposit insurance that provides the motivation for regulation. Dewatripont and Tirole (1993) emphasize the protection of small depositors. Excessive regulations stie the growth of banking sector and weak and fragile regulations and supervision lead to nancial crises. So need is to devise optimal level of regulations and supervision practises. As the bank crises has multifact problems for the economy so prudential regulations has been desinged . The Basel Accord is the manifestation of these regulations. The three pillar approach of Basel II Accord says minimum camital requirement greater than or equal to 8 percent supervisory review process market discipline If we talk abou the problems of the banking system principal agent problem is the major one. The nature of banking is such that it suers from agency problem. The principle agent theory can be applied to explain the nature of contract between : the the the the shareholders of a bank(principal) and its management (agent) bank (principal ) and its ocers (agent) bank (principal) and its debtors (agent) and depositors (principal) and bank (agent)

Incentive problems arise because the principal can not observe and/or have perfect information about agents action. Asyemmetric inforamtion gives birth to adverse selection problem. The problem of adverse incentives (higher interest rates encouraging borrowers to undertake riskier activities) is an other reason why banks will reduce the size of a loan or even refuse loans to some individual or rms. Moral hazard is another problem Deposit insurance scheme makes the depositor lazy from monotoring the bank and for bank it alter 2

the nature of contract and bank starts to invest in riskier ventures and at the end manager says it was bad luck. Government has to intervene with the tax payers money to rescue the banks to keep the economy out from severe depression and fancy terminologies like renationalisation is coined. Here I would like to make one point the government should sign a contract with the bank that once the turmoile is over bank will pay to the government equivalent to the injected liqudity over a certain period of time. The next section is about eciency of the banking system. The question is how eciecny of the banking system is measured. what is the output of the banking system. So the denition of output and productivity is not straight forward in the banking industry. should deposits be treated as inputs or outputs ? the measure of output of nancial services has special problems because they are not physical quantities. additionally it is dicult to account for qualities of bank services. There approcahes used to measure bank output are Production approach this approcah measures bank output by treating bank as a rm which use capital and labour to produce dierent catagories of deposits and loan accounts.Output is treated as a ow. According to this approach the production function is 1 Q = Af (K, L, D, S, F ) (2) where Q : bank output A : bank eciency K,L : capital and labour, respectively D : demand deposits S : small time and saving deposits F : purchased funds The other approach is the Intermediation Approach this approach recognises intermediation as a core activity- banks are not producer of loan or deposit services.Output is measured by the value of loans and investments.Bank output is treated as a stock Most bank productivity studies use intermediation approach because there are fewer data problems than with the production approach. However, both the approaches fail to address number of issues like no account is taken of the dierent risk attached to each loan. The maturity structure of loan and depsoits , critical in banking, is generally ignored. The techniques used to measure eciecny are Data Envelope Analysis (DEA) and Stochastic Frontier Analysis (SFA). The former is non-parametric and later is parametric one. The other approaches used are Distribution Free Approach (DFA) and Thick Frontier Approach (TFA) Now something about measurement of bank eciecny the overall bank eciency can be decomposed into scale eciency, scope eciency, technical eciency and allocative efciency.
1. Humphrey 1992

Scale Eciency The bank has scale eciency when it operates in the range of constant return to scale. Scope Eciency ; Scope eciency occurs when the bank operates in different diversied locations. When the bank maximises the output from the given level of output Technical Eciency occurs. Allocative Eciency happens when the bank choose the revenue maximising mix of output. Theoratically a bank is fully ecient, if it produces the output level and mix that maximises revenue and minimises possible costs.X-Eciency includes both allocative eciency and technical eciency.