Over the last thirty years, a new paradigm in banking theory has
overturned economists' traditional vision of the banking sector. The
asymmetric information model, extremely powerful in many areas of
economic theory, has proven useful in banking theory both for explaining
the role of banks in the economy and for pointing out structural
weaknesses in the banking sector that may justify government
intervention. In the past, banking courses in most doctoral programs in
economics, business, or finance focused either on management or monetary
issues and their macroeconomic consequences; a microeconomic theory of
banking did not exist because the Arrow-Debreu general equilibrium model
of complete contingent markets (the standard reference at the time) was
unable to explain the role of banks in the economy.
This text provides
students with a guide to the microeconomic theory of banking that has
emerged since then, examining the main issues and offering the necessary
tools for understanding how they have been modeled. This second edition
covers the recent dramatic developments in academic research on the
microeconomics of banking, with a focus on four important topics: the
theory of two-sided markets and its implications for the payment card
industry; "non-price competition" and its effect on the
competition-stability tradeoff and the entry of new banks; the
transmission of monetary policy and the effect on the functioning of the
credit market of capital requirements for banks; and the theoretical
foundations of banking regulation, which have been clarified, although
recent developments in risk modeling have not yet led to a significant
parallel development of economic modeling. This book also tells us about concept of banking efficiency.
Xavier Freixas is Dean of the
Undergraduate School of Economics and Business Administration and
Professor at the Universitat Pompeu Fabra, Barcelona. Jean-Charles
Rochet is Professor of Mathematics and Economics at the University of
Toulouse School of Economics.
