2.5. Multiple lenders (2) – bank contracts

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Из курса от партнера Moscow Institute of Physics and Technology

Capital Markets and Financial Institutions – How to Survive Them

4 оценки

Moscow Institute of Physics and Technology

Capital Markets and Financial Institutions – How to Survive Them

4 оценки

Курс 1 из 5 — Specialization Understanding Modern Finance

Capital markets and financial institutions are all around us. This is an enormous industry in which powerful players oftentimes challenge investors and the public at large and expose them to significant risks. This Course provides for the deep understanding of the core ideas, concepts, and mechanisms of the modern capital market in a learner-friendly way. We will analyze the market’s most fundamental problems, realize the intrinsic interests of the market participants, reveal the true meaning of certain financial terms, and uncover credible signals of the likely behavior of economic agents – all that with little math and a lot of fun. The learners will be much better positioned with respect to the financial environment. They will see through the financial news, reveal the risks of the financiers’ wishful thinking promises, and protect themselves against dangerous adventures. The learners will get the opportunity to use the obtained knowledge, skills, and understanding for the successful professional career in the financial and other business areas, as well as in their day-to-day life.

Из урока

ALLEVIATION OF MORAL HAZARD – DEBT AND EQUITY CONTRACTS. BANKS (1) – DIVERSIFICATION AND MONITORING

In Week 2 we will consider certain ways of overcoming problems caused by private information and evaluate them. We will know why some methods work while others don’t, and why. You will learn the core differences between equity and debt financing, study debts contracts with liquidation and see the core inefficiency of that kind of a debt contract. Based on a simple model you will study diversification and delegated monitoring and see how they contribute to the efficiency of lending. We will find out how a bank emerges as a key financial intermediary responsible for asset monitoring. You will be able to see why the bank can make money and to calculate its profit in different cases. At the end of Week 2 we will pose a fundamental question: How does the bank attract depositors?

2.1. Infeasibility of equity financing in the presence of unobservability7:11

2.2. Debt contract with liquidation (DCL) as a means of alleviation of moral hazard. The inefficiency of DCL6:41

2.3. Monitoring as a universal and efficient way of overcoming unobservability5:20

2.4. Multiple lenders (1) – the model8:19

2.5. Multiple lenders (2) – bank contracts5:15

2.6. Delegated monitoring (1) – the interaction of the parties and bank’s profit12:09

2.7. Delegated monitoring (2) – banks’ vulnerability to runs5:21

Познакомьтесь с преподавателями

Konstantin Kontor
Director and Professor of Finance and Strategy
American Institute of Business and Economics (AIBEc)

Now in this episode, I will step back from the matrix for a moment.

I will draw a picture how all that unfolds.

So, we have first of all this crowd of investors 120,000 of

investors and each investing 100 dollars for

the total of 12 million dollars.

Now, then there are two borrowers.

I will draw them like this one kind of business.

So, here previously when six million dollars and then the other borrower,

so this is the computer also six million dollars.

So that was before,

now comes a bank, bank comes here.

And the bank says,

here I will engage in the debt of the liquidation.

All these depositors will see in just a minute how was structured and here

I will engage in monitored conference so that I will view

six and they will receive as we know seven point five six seven point five.

So this is about all these goes.

Now, so to the extent we see the contract between the bank and

the borrowers that we talked about quite in

detail now it's sort of more interesting for us,

why is that that these people will be willing to deposit the money with the bank?

Because basically before we knew that when the bank didn't exist they went directly here.

These contracts were bank contracts

that contracts with liquidation and everything went fine.

Now, they have a liquidation with a bank.

And it goes like this,

so this is the bank and this is the deposit there.

So how do they communicate.

The bank says, you the deposit that gives 100 dollars to the bank.

And the bank gives back the depositor

the amount that is 100 plus Delta where they'll to positive,

in such a way that they expected

cash flow to the depositor is equal to exactly 100 dollars.

Well, this amount of Delta will find in the next episode.

But for now, it is important to say that I claim that in this kind of a setup,

what we see is first of all the contracts of the black man are so between

the borrower and the bank is no worse and no

better than the contract between the borrower and directly with the depositor.

So borrowers are indifferent.

That I claim that there is

a way to set up a contract between the depositors and the bank,

so that they're indifferent to only in terms of cash flow.

And I will prove that the bank in this setup does make a positive amount of growth.

Now clearly in reality there is another plus to this scheme

because you can't say

that the interaction between these depositors and the bank it may be standardized,

so for these people it is easier maybe the bank will also

provide some other things for them to do it will see that further on in the next week.

But for now we can say that in reality for the depositors

small people to communicate directly with the borrower may

be kind of different and may involve

some costs that we do not analyze in this scheme all that,

we for now ignore we have made this setup really grossly

simplified and still efficient enough to show that the scheme is workable.

So, in the next episode based on the scheme we will go back to the Matrix,

see the cash flows that now not are enjoyed

in all these boxes but instead the cash flows that

arrive to the bank based on these described contracts.

And then that will see how the bank will be able

to deliver on its obligations and also to make money.

All that we will see in the next episode.

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