The Journal of Finance

Deposit Insurance and the Discount Window: Pricing under Asymmetric Information

Published: 06/01/1986   |   DOI: 10.1111/j.1540-6261.1986.tb05047.x

GEORGE KANATAS

The risk‐sensitive pricing of deposit insurance and the discount window is determined in an environment where banks have private information concerning their financial conditions. The two facilities are managed jointly; an incentive‐compatible policy is designed such that banks' choice of terms at which they can obtain insurance and access to discount window credit will reveal their asset quality. The function of the discount window is to be a risk‐neutral “lender of last resort” to banks in a market dominated by risk‐averse depositors.

Integration of Lending and Underwriting: Implications of Scope Economies

Published: 05/06/2003   |   DOI: 10.1111/1540-6261.00562

George Kanatas, Jianping Qi

Informational scope economies provide a cost advantage to universal banks offering “one‐stop shopping” for lending and underwriting that enables them to “lock in” their clients' subsequent business. This market power reduces universal banks' incentive, relative to that of specialized investment banks, to apply costly underwriting efforts; consequently, universal banks are less successful in selling their clients' securities. Our results suggest that an integrated financial services market is less innovative than one with specialized intermediaries. Our analysis also identifies economy, intermediary, and firm characteristics that motivate either the integration or segmentation of bank lending and underwriting.

Bank Forward Lending in Alternative Funding Environments

Published: 09/01/1982   |   DOI: 10.1111/j.1540-6261.1982.tb03589.x

SUDHAKAR D. DESHMUKH, STUART I. GREENBAUM, GEORGE KANATAS

This paper examines the effects of loan commitments on bank lending behavior in both deposit‐funding and liability management environments. Assuming that the bank lends exclusively under commitments and that the number of commitments exercised is uncertain, the bank must choose its supply of commitments. Given this choice, the bank becomes a passive lender to commitment holders. Our focus on forward credit markets sheds new light on the private bankers' assertion that they do not directly determine their level of lending, but merely “accommodate” the credit needs of their customers. Similarly, the central banker's claimed inability to control monetary aggregates in the short‐run becomes understandable in a new context. It is shown that the advent of liability management will reduce the volume of loan commitments and the expected size of the bank and of the banking system. It is also shown that increased uncertainty regarding borrower takedown behavior diminishes the volume of commitments, expected bank and banking system size.

Interest Rate Uncertainty and the Financial Intermediary's Choice of Exposure

Published: 03/01/1983   |   DOI: 10.1111/j.1540-6261.1983.tb03631.x

SUDHAKAR D. DESHMUKH, STUART I. GREENBAUM, GEORGE KANATAS

The financial intermediary's choice of operating as a broker with minimal risk exposure or as an asset‐transformer with interest rate risk is modeled as a funds inventory decision made prior to the resolution of uncertainty regarding the borrowing or lending interest rates. It is shown that an increase in the interest rate uncertainty leads the intermediary to reduce its exposure, thereby offering decreased asset‐transformation and more brokerage services. However, a stochastic increase in the interest rates leads to greater asset‐transformation and less brokerage services.

Lending Policies of Financial Intermediaries Facing Credit and Funding Risk

Published: 06/01/1983   |   DOI: 10.1111/j.1540-6261.1983.tb02507.x

SUDHAKAR D. DESHMUKH, STUART I. GREENBAUM, GEORGE KANATAS

This paper compares the optimal lending decisions of financial intermediaries that differ in their risk exposure. All intermediaries are assumed to face a loan demand described by a random applicant arrival process with each applicant offering a unique risk‐adjusted rate of return; loan demand is therefore uncertain in both quantity and quality. The intermediaries differ in terms of their risk exposure because of disparate funding practices. Intermediaries functioning as brokers minimize their exposure by borrowing funds only as demand is realized, whereas those behaving as asset‐transformers borrow in advance of realizing loan demand, thereby maintaining a loanable funds inventory and sustaining the related exposure. The optimal sequential lending policy is shown to involve setting a credit standard that becomes stricter with the length of the intermediary's planning horizon and the volume of loans outstanding. Most importantly, it is shown that brokers adopt stricter credit standards than asset‐transformers and therby reduce their volume of lending.