What do financial intermediaries do?

Allen, Franklin; Santomero, Anthony M.

doi:10.1016/s0378-4266(99)00129-6

Cited by 377 publications

(210 citation statements)

References 16 publications

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“…The same trend is visible in the United States, as we already know from studies by Barth, updated by Allen and Santomero (2001). They calculated that bank assets to GDP rose from 25% in 1950 to over 80% in 1998.…”

Section: Total Financial Assets and Bank Credit As A Percentage Of Gdpsupporting

confidence: 56%

Notes And Communications

Wensveen

2008

De Economist

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SummaryThis communication sketches in headlines long term developments in American and European banking. Contrary to the expectation of both practitioners and theorists in the nineties, has the role of banks in the economy not diminished but increased. This is demonstrated by the long term increase of bank credit as a percentage of GDP (resulting in a stronger growth of M2 and 3 than GDP), a growing contribution of bank sector income to GDP, growing employment (until recently) and a growing share of bank shares in total market capitalisation over the past three decades until [2004][2005][2006]. This growing share may have been induced by a comparatively superior performance, supported by a relatively high dividend yield, despite a lower-than-average price-earning ratio. Banks counteracted increased competition and disintermediation tendencies in their traditional lending business by a progressive involvement in capital markets. They developed themselves, in several functions, these markets. For this reason the often used distinction between bank-based and market-based financial systems is less meaningful. Capital markets function thanks to banks. Even more because a rapidly growing volume of new, unlisted investment instruments are constructed by banks and traded over their counter. By this development the risk absorbing and intermediating function of banks -being their basic function in the financial system -is also accentuated. The professional capability of leading banks to fulfil this basic function has in the current "sub prime" crisis come under severe criticism.Key words: bank assets/M3, bank/market-based systems, bank performance, banks' weight in market capitalisation, risk transformation, information asymmetry, bank crisis JEL Code(s): G15, G20, G21

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Section: Total Financial Assets and Bank Credit As A Percentage Of Gdpsupporting

confidence: 56%

Notes And Communications

Wensveen

2008

De Economist

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“…The growth of non-intermediation activities suggests that intermediation activities are becoming less important part of banking business strategies and therefore strategically, banks have shifted their product mix by diversifying into other income sources (Allen and Santomero, 2010). A good number of reasons attract a commercial bank towards diversification.…”

Section: Introductionmentioning

confidence: 99%

Income Diversification and Bank Risk-Return Trade-Off: Evidence from an Emerging Economy

Ekanayake

Wanamalie²

2017

Asian Economic and Financial Review

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“…In bank-based financial systems, on-balance IRR management is conducted more frequently compared to market-based financial systems that rely more heavily on derivatives hedging. Allen and Santomero (2001) explain this difference between market-based systems, such as the U.S., and bank-based systems, such as Germany, drawing on the model of Allen and Gale (1997). The lack of competition from financial markets is considered to be the basis for German financial intermediaries' ability to manage risk on-balance.…”

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confidence: 99%

Determinants of bank interest margins: Impact of maturity transformation

Entrop

Memmel

Ruprecht

et al. 2015

Journal of Banking & Finance

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This paper explores the extent to which interest risk exposure is priced in bank margins.Our contribution to the literature is twofold: First, we present an extended model of Ho and Saunders (1981) that explicitly captures interest rate risk and returns from maturity transformation. Banks price interest risk according to their individual exposure separately in loan and deposit rates, but reduce these charges when they expect returns from maturity transformation. Second, using a comprehensive dataset covering the German universal banks between 2000 and 2009, we test the model-implied hypotheses not only for the commonly investigated net interest income, but additionally for interest income and expenses separately.Controlling for earnings from bank-individual maturity transformation strategies, we find all banks to charge additional fees for macroeconomic interest volatility exposure. Microeco- Non-technical summaryBanks are intermediaries between investors and entrepreneurs. They transform long-term, illiquid and risky loans into safe deposits that are due within short notice. By doing so, they take risks, for which they are remunerated. Besides, they can generate income by making use of their market power and by setting their credit and deposit conditions accordingly. In a theoretical model, we show that the bank rates are set in accordance with the costs and earnings caused by the loans and deposits. In addition, banks levy premia for credit and interest rate risk, and for the access to the capital market. We derive the following empirically testable hypotheses:The margins on the asset side should be the higher, the stronger the market power, the more volatile the interest rates and the credit risk and the greater the exposure to interest rate risk.The model also predicts that banks smooth their interest rates (relative to the interest rates observed on the capital market). Accordingly, on the liability side, we expect the same factors to have an impact, expect for the credit risk, which is here not relevant. In an empirical study of all German universal banks for the period 2000 -2009, we obtain the following results:1. The statements derived from the theoretical model can be confirmed in our study, in particular we find that the higher the market power the higher the interest income margin and the lower the interest expense margin.2. The interest rate margins increase for all banks, in the event that the interest rates become more volatile. Additionally, for banks from the savings and credit cooperative sectors, we see the smoothing of bank rates that is predicted by the theoretical model. Nichttechnische Zusammenfassung

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What do financial intermediaries do?

Cited by 377 publications

References 16 publications

Notes And Communications

Notes And Communications

Income Diversification and Bank Risk-Return Trade-Off: Evidence from an Emerging Economy

Determinants of bank interest margins: Impact of maturity transformation

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