Pricing Policies of Financial Intermediaries by J. Dermine

By J. Dermine

The fundamental function of this examine is to strengthen a framework that would clarify the habit of monetary intermediaries and, extra accurately, their pricing rules. As monetary intermediation is the company of economic resources and liabilities, use is made from techniques and versions built culture­ best friend in Finance and Economics to finish up with innovations not just for optimum offerings of rates of interest but additionally for correct rules and extra brilliant accounting equipment. additionally, the econometric implications of deposit charges stickiness are tested and empirically validated on Belgian information. My debt to many folks has been transforming into in the course of those years and it's a nice excitement to print a textual content and feature the chance to thank those that were so beneficial. to begin with, enable me thank Professor Jacques Dreze, my thesis director. i'm thankful to Jacques for encouragments, assistance and such a lot of stimulating discussions. I additionally thank the participants of the Jury, Professors A. Jacquemin, A. Kervyn de Lettenhove, A. Lamfalussy, P. Reding and A. Siaens for reviews on past drafts of the manuscript. Discussions with Professor P. Howitt whereas he was once traveling the heart for Operations examine and Econometrics (C.O.R.E., Universite Catholique de Louvain) in 1979 have drastically contributed to my below­ status of the economics of chance sharing among creditors and debtors. Philippe Gille has been tremendous precious in accomplishing the joint econometric estimation in bankruptcy 5 and in suggesting a great technique to current the results.

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Pricing Policies of Financial Intermediaries

The first goal of this research is to boost a framework that may clarify the habit of monetary intermediaries and, extra accurately, their pricing regulations. As monetary intermediation is the company of monetary resources and liabilities, use is made up of strategies and types built culture­ best friend in Finance and Economics to finish up with strategies not just for optimum offerings of rates of interest but additionally for correct rules and extra good accounting equipment.

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As already mentioned, deposit holders are, in most countries, very well protected either by an explicit insurance mechanism (such as the FDIC in the United States) or, de facto, by the "lender of last resort" function of the Central Bank. There is no explicit insurance mechanism in Belgium, but the Institute for Rediscount and Guarantee (Institut de Reescompte et de Garantie) uses its discretionary power to compensate deposit holders in case of bankruptcies. , 1980) and the leading (public) savings bank (Caisse Generale d'Epargne et de Retraite) has its deposits guaranteed by the State.

The deposit rate, d t ' maximizing c t +2 will maximize the oneperiod economic profit c t + 1 6 and a powerful proposition is thus obtained PROPOSITION 2 : A muZtiperiod problem 'aolZapses' to a single- period one and a manager should be looking at the first period economia profit even if he is maximizing his end of horizon aash flows. The deposit maturity is determinant to define the relevant marginal income. A term deposit maturity is a clearly defined concept six, twelve or n-month deposits.

It is amazing that a reverse recursivity occurs when the deposit supply is function of the expected return : the loan rate is chosen first. The 'uncertainty' case the expected return on deposits is relevant For a clearer presentation, we present the case 'a = 0' . The reader is referred to the Appendix for the general case (a;> 0) • We first define the expected return on deposit, d : d I (I +d)D =/ K a* * (l+d)D f(a)da + fa (a+ (l+g)B) f(a)da. 13) The first integral represents depositors' income when the intermediary can cope with its obligations; the second, income in case of bankruptcy.

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