WHY BANKS EXIST!

Gert Jan Mulder

March 24, 2004

Structure of the DBA

DBA THESIS BANKS, CREDIT AND CULTURE-

differences

Why banks exist.

Credit & Credit rating

Cross cultural studies

ONTOLOGICAL RELATIVISM

I subscribe to ontological relativism, i.e., and the claim that things are different from different points of view and the idea that different viewpoints are equally valid. Moreover, contrary viewpoints may well be equally valid across particular and peculiar societal settings.

CONTENTS OF PRESENTATION History of banks and banking Relevant economic theories, agency

theory, transaction cost theory and intermediation theory

Position of banks today Conclusions

HISTORY OF BANKING

– Everything has been said before, but since nobody listens we have to keep going back and begin all over again - André Gide, French critic (1869 – 1951)

– 9000-6000 BC Domestication of cattle and cultivation of crops– c. 3000-c. 2000 BC Development of banking in Mesopotamia– c. 1792-c. 1750 BC Reign of Hammurabi in Babylon- first time reference is made to

banking laws, later to become the foundation on which banks operate– c. 350 BC Normal rate of interest in Greece is 10 per cent except for risky business– 30 AD Christ drives the money changers out of the Temple in Jerusalem– 1401 Bank of Barcelona founded!– 1602 Dutch East India Company founded– 1694 Bank of England founded– development of banking goes hand in hand with laws and regulations and financing of

wars and crusades (Rothschild- Bank of England)– history of banking in painted in red due to repeated crisis…………...

Relevant economic theories

Transaction cost theory (Coase 1937, Williamson, 1975)– bounded rationality - they do not know any better!– opportunism - definition in economic theory!!

Agency Theory (Jensen and Meckling 1976, Arrow 1985, Eisenhardt 1989)– opportunistic behaviour– moral hazard & adverse selection

Intermediation theory (Fama 1980, Kareken 1985, Corrigan 1982, Borsonne 2001)

Information Economics - asymmetry of information - Stiglitz (2000)

OPPORTUNISM

– For Williamson (1985:47), opportunism includes lying, stealing and cheating, but it more generally refers to the incomplete or distorted disclosure of information, especially to calculate efforts to mislead, distort, disguise, obfuscate or otherwise confuse partners in an exchange. TCT does not assume that all economic actors are always opportunistic.”

DEFINITIONS

– MORAL HAZARD: Actions by agent are hidden or costly to observe

– ADVERSE SELECTION: Agent possseses information that is unobservable or costly to obtain for principals

INTERMEDIATION THEORY

CREDIT FUNCTIONS LIQUIDITY FUNCTION TRANSACTION ACCOUNTS INTEGRATED FUNCTIONS CIRCUIT APPROACH AND MONEY

CREATING

POSITIONS OF BANKERS

regulatorslaws shareholders

competition

MARKETS CLIENTS COLLEAGUES

DOWNWARD PUSH: STANDARDISE

UPWARD PUSH: SPECIALISE

BANKER: STUCK IN THE MIDDLE

CONCLUSIONS

AGENCY THEORY TRANSACTION COST THEORY INTERMEDIATION THEORY

– COMBINED HELPS US TO UNDERSTAND WHY BANKS EXIST - YET IT ALL DEPENDS - ONTOLOGICAL RELATIVISM