Can we live without banks? (PDF)

Essay from the year 2018 in the subject Business economics - Banking, Stock Exchanges, Insurance, Accounting, grade: 67%, University of Strathclyde, language: English, abstract: Banks are defined by Gertler and Karadi (2011) as commercial institutions which act as financial intermediaries in the financial market. Imperfect capital markets where transaction costs and asymmetric information exist are the reasons for the existence of banks, as stated by Scholtens and van Wensveen (2000). According to Allen and Santomero (2001) their aim is reallocating the resources of economic units with surplus funds, when they have more money than they need to spend, to economic deficit units, when they need to spend more money than they have. To do this, they must be in possession of a banking license, as explained by Ajwain (2010). As highlighted by Kashyap et al. (2017) they are using both sides of their balance sheet in doing so. In fact, they are taking deposits from savers and making loans to borrowers. Kashyap et al. (2002) argued that this kind of business is subject to three tasks of transformation. The first transformation is maturity. Typical bank loans given are medium or long-term, while received deposits are usually payable on demand. Secondly, there is risk transformation regarding the capability of intermediaries to diversify risks such as default risks of bank loans or interest risks of bonds bought by the bank. The third task of transformation refers to size issues. Banks pool small savings of savers to make large loans to borrowers. Banks are, as outlined by Sikdar and Kumdar (2017), also providing payment services to their customers. In doing their business, banks concentrate on the mass market with focus on individuals and smaller businesses, as described by Ashton (2002). Byers and Lederer (2001) call these kinds of banks inside the whole banking industry retail banks.