Purpose – already for more than one hundred years there is an ongoing discussion about the role and function of banks, which subsequently has affected banking regulation. Three theories of banking were dominant in different periods of the 20th century: Credit creation theory (the oldest), Fractional reserve theory, Financial intermediation theory. Authors are contributing to the theoretical discussion with research showing that Credit creation theory and Financial intermediation theory reflect different insights on banks’ operations. Research methodology – literature review (regarding theories), financial ratio calculations (Loans-to-Deposits ratio); Findings – using Loans-to-Deposits ratio calculations for several banks researchers have found that banks’ lending process can be explained by Credit creation theory however banks’ Strategic Asset-Lability Management can be explained by Financial intermediation theory. Research limitations – (a) only domestic banks were selected as in this research it is important to get the needed relationship between deposits and lending. Subsidiaries of foreign banks could have not balanced balance sheet from Loansto-Deposits ratio perspective as their funding could come from abroad if the business model in Baltics is primarily lending oriented, (b) Baltic market was taken because of know-how of researchers about banks operations here and history of their transformation, (c) audited financial reports were used as they gave a sufficient picture of banks Loansto-Deposits ratio. Practical implications – theoretical discussion in this paper enlightens the role and function of the banks thereby improving understanding of better banking regulation. Authors propose to adjust the current banking regulatory framework which is focused on capital requirements. Originality/Value – current research provides some link between existing banking theories (Credit creation theory and Financial intermediation theory) shaping a new hybrid concept and proposing an adjusted regulatory framework based on this hybrid concept
In the field of the economics’ regulation researchers so far have built the conceptual framework showing how the deadweight loss of market failures decrease and costs of the government intervention in-crease with the increased level of the government intervention. In order to quantify relationships between the level of intervention, intervention costs and the deadweight loss with econometric models it is im-portant to understand how to apply coordinates for the data points to be included in the modelling. The main goal of the research presented in this paper is to find the unit measure for the asis of the independentvariable, i.e. to shape the categorical scale corresponding to the level of intervention.
Financial market failures lead to deadweight (welfare) loss for society. Assessment of the deadweight loss started with the so-called Harberger Triangles, where Harberger offered a clear and persuasive derivation of the triangle method of analysing the deadweight loss and applied the method to estimate deadweight losses due to income taxes in the United States. Hertog further put the deadweight loss into the model with government intervention to assess the optimal level of welfare loss control. This concept is central to regulatory economics. Harberger’s approach is based on the deviation of market equilibrium measured in terms of price and quantity. When analysing imperfect competition as one of the market failures, authors have identified in the literature variables for “price” and “quantity”. The research presents the approach how calculating the deadweight loss arising from the imperfect competition using the following variables: “price” – interest rates (loans), “quantity” – exposure of loans on banks’ balance sheets. The outcome of the research is integral for the assessment of the deadweight loss arising from imperfect competition. Deadweight loss calculations for selected countries show results corresponding to the expectation to be lower than 12% - the maximum value is 4,6% for Latvia, which experienced the most significant increase in the banking market concentration from the sample. Research methods used: literature analysis, regression analysis, and mathematical analysis tools (integrals).
Market failures lead to the deadweight (welfare) loss for the society. Assessment of the deadweight loss started with so called the Harberger Triangles, where Harberger offered a clear and persuasive derivation of the triangle method of analyzing the deadweight loss and applied the method to estimate deadweight losses due to income taxes in the United States. Harberger’s approach is based on the deviation of market equilibrium measured in terms of price and quantity. When analyzing the information asymmetry as one of the market failures authors have identified in the literature variables for “price” and “quantity”. Research hypothesis is that there is the deadweight loss arising from the information asymmetry in euro area. Research then presents the approach how to calculate the deadweight loss arising from the information asymmetry using the following variables: “price” – interest rates (loans). quantity” – exposure of loans on banks’ balance sheets. Research methods used: literature analysis, regression analysis, mathematical analysis tools (integrals).
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