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N1577

Principles of Banking

Seminar 2. The Economics of Banking

Students are required to work in groups to discuss the following questions and problems. At the end of the discussion, a nominated student will make a short presentation.

1.   Why are financial intermediaries willing to engage in information collection activities when investors in financial instruments maybe unwilling to do so?

2.   Suppose you go to your local bank, intending to buy a certificate of deposit with your savings. A person enters the bank and applies for a car loan. Would you offer a loan to that person? Assume that the interest rate you would offer for that loan would be higher than the rate the bank pays on certificates of deposit, but lower than the rate the bank charges for car loans. Explain your decision.

3.   What specific procedures do financial intermediaries use to reduce asymmetric information problems in lending?

4.   Many policymakers in developing countries have proposed the implementation of a system of deposit insurance similar to the system that exists in the United  States. Explain why this might create more problems than solutions in the financial system of a developing country.