[영문] CONTENTS
Preface = xxiii
Introduction = xxv
About the Author = xxx
PART Ⅰ PRINCIPLES = 1
CHAPTER 1 Lending, Payments, and Trade in Risk = 3
Trade and the Gains from Trade = 4
Saving, Investment, and Lending = 4
Saving and Wealth = 4
Investment = 6
Gains to Trade in Borrowing and Lending = 7
Trade in Risk = 7
Insurance = 7
Forward Transactions = 8
The Difficulties of Trade = 10
Trade and Trust = 10
The Problems Involved in Lending = 10
The Problems of Trade in Risk = 14
The Common Pattern = 16
Summary = 17
Discussion Questions = 18
Bibliography = 19
Key Terms = 19
CHAPTER 2 The Financial System and Its Technology = 20
Payments = 21
Reducing the Costs of Payment in Cash = 21
Fractional Reserve Banking = 22
Lending = 24
Direct Lending and Financial Markets = 25
Indirect Lending and Financial Intermediaries = 28
Direct or Indirect Lending? = 30
Trade in Risk = 33
Insurance = 33
The Technology of the Financial System = 37
Delegation = 38
Credit Substitution = 38
Pooling = 39
Netting = 39
How Different Institutions Use the Basic Techniques = 40
Summary = 40
Discussion Questions = 41
Bibliography = 41
Key Terms = 42
CHAPTER 3 Efficiency, Stability, and Government Intervention = 43
Efficiency = 44
The Potential Gains from Lending = 44
Conditions for Efficiency in Lending = 47
Efficiency in Payments and in Trade in Risk = 50
Market Failure and Inefficiency = 51
Intervention to Promote Competition = 52
Intervention to Lower Costs = 53
Stability = 54
Bank Runs and Banking Panics = 54
Securities Market Crashes = 55
Price-Level Instability = 56
Market Failure and Instability = 57
Intervention to Promote Stability = 58
The Trade-off between Stability and Efficiency = 60
Regulation and Innovation = 61
Other Types of Government Intervention = 61
Consumer Protection = 61
Social Policy = 62
Government Failure = 62
Intervention Often Serves Special Interests = 62
Intervention Is Costly = 63
Intervention Often Does Not Work = 63
Summary = 64
Discussion Questions = 64
Key Terms = 65
CHAPTER 4 Interest Rates, Exchange Rates, and Security Prices = 66
Pricing Securities Promising a Single Payment = 67
Multiple Periods and Compounding = 68
Example 4.1 = 68
Example 4.2 = 69
The Compounding Period and the Effective Annual Rate = 69
Example 4.3 = 71
Pricing Securities Promising Multiple, Payments = 72
Bonds with Annual Coupons = 72
Example 4.4 = 74
Bonds with a Coupon Period of Less than a Year = 74
Example 4.5 = 74
Amortized Loans = 75
Example 4.6 = 75
Example 4.7 = 75
Example 4.8 = 76
Market Yield on a Security Promising Multiple Payments = 76
Example 4.9 = 77
Application : Understanding Treasury Listings = 78
Interest Rate Risk = 81
Interest Rate Risk on Securities Promising a Single Payment = 82
Example 4.10 = 84
Interest Rate Risk on Securities Promising Multiple Payments = 85
Example 4.11 = 87
Example 4.12 = 88
Exchange Rate Risk = 89
Example 4.13 = 89
Monetary Expansion and Prices = 91
Real and Nominal Values = 93
A Measure of Prices = 93
Measuring in Constant Dollars = 94
Real and Nominal Interest Rates = 95
Adjusting to Inflation = 96
Summary = 99
Discussion Questions = 99
Key Terms = 100
PART Ⅱ INTERMEDIARIES = 100
CHAPTER 5 Understanding Financial Intermediaries = 103
You Open a Bank = 104
Balance Sheets and T-Accounts = 104
Profits and Return on Equity = 106
Ways to Increase Return on Equity = 108
Setting Rates on Deposits and Loans = 108
The Competitive Environment = 109
Asymmetric Information and Adverse Selection = 109
The Risk-Return Trade-off = 110
Deposits, Reserves, and Liquidity = 111
Increasing Deposits = 111
Reducing Reserves = 111
Why a Bank Needs Liquidity = 112
Asset Management and Liability Management = 112
Equity and Solvency = 113
Equity and ROE = 113
Equity and Risk = 114
Economies of Scale and Scope = 117
Economies of Scale = 119
Economies of Scope = 123
Banks and Other Intermediaries = 123
Summary = 125
Discussion Questions = 126
Key Terms = 127
CHAPTER 6 What Is a Bank? = 128
The Evolution of the Modern Bank = 129
Banking in Europe = 129
Banking in England = 132
Banking in America = 134
Near Banks = 135
The Pattern of Bank Evolution = 141
The Evolution of Bank Assets = 142
Commercial Lending = 142
Lending to Noncommercial Borrowers = 148
The Evolution of Bank Liabilities = 149
Checking Deposits, Banknotes, and Time Deposits = 150
Interbank Deposits = 150
Interest Rate Restrictions and the Revolution in Bank Liabilities = 151
Innovations in Consumer Deposits = 155
The Evolution of Bank Activities = 156
Economies of Scope Related to Payments = 156
Economies of Scope Related to Intermediation = 156
Economies of Scope in Marketing = 159
Regulatory Obstacles to the Expansion of Bank Activities = 160
The United States = 160
Other Countries = 163
Europe = 163
Japan = 164
The Decline of the Bank? = 164
Summary = 166
Discussion Questions = 167
Bibliography = 168
Key Terms = 168
CHAPTER 7 The Banking Industry = 169
The History of the Banking Industry = 170
Three Key Factors in the Evolution of the Banking Industry = 170
Economies of Scale between Banks : Correspondents and Money Markets = 173
Consolidation in England and the Advantages of Branch Banking = 175
Consolidation in the United States = 177
Living with Branching Restrictions = 178
Getting Around Branching Restrictions = 178
The Movement towards Interstate Banking = 180
International Banking = 182
Reasons for the Expansion of International Banking = 182
Multinational Banking = 184
Offshore Banking : The Eurocurrency Market = 186
The Implications of Banking Consolidation = 191
The Implications of Consolidation for the Banking Industry = 191
The Implications of Consolidation for Bank = Customers = 194
Summary = 196
Discussion Questions = 197
Bibliography = 198
Key Terms = 198
CHAPTER 8 Payments and Foreign Exchange = 199
The Different Types of Money = 200
Fed Dollars = 200
Bank Dollars = 202
Checks = 202
The Check-Clearing System = 203
Check Enhancements = 204
Special Checks = 204
Giro Payments = 205
Credit Cards = 206
The Store Credit Card = 206
The Third-Party Card = 206
The Four-Party Card = 207
Delayed Debit Cards = 207
Electronic Payments = 208
Online Electronic Payments : Fedwire and CHIPS = 208
Automated Clearinghouses(ACHs) = 210
Electronic Debit Cards : ATMs and EFTPOS = 211
Payment on the Internet = 213
The Use of Different Methods of Payment = 213
Different Payments Methods for Different Transactions = 213
An International Comparison of Payment Patterns = 213
Why Payment Patterns Differ = 214
Foreign Exchange = 217
The Problem of Different Clearing Systems = 217
A Foreign Exchange Transaction = 218
"Domestic Exchange" = 218
The Foreign Exchange Market = 219
Growth of the Market = 219
How the Market Works = 219
The Payments System and Public Policy = 221
Efficiency of the Payments System = 221
The Importance of Stability in the Value of Money = 223
Stability of the Payments System = 224
Summary = 225
Discussion Questions = 226
Bibliography = 227
Key Terms = 227
CHAPTER 9 Insurance = 228
The Economics of Insurance = 229
Pricing of Premiums = 229
Marketing = 231
Incentive Problems = 232
Life Insurance = 234
The Evolution of Life Insurance in the United States = 235
Life Insurance Policies = 237
Retirement-Related Products = 240
Health Insurance = 241
Life Insurance Assets and Liabilities = 242
Property-Liability Insurance = 243
The Evolution of Property-Liability Insurance = 243
The Property-Liability Business = 244
Property-Liability Insurance Today = 247
Reinsurance = 247
The Function of Reinsurance = 247
The Reinsurance Treaty = 248
The Reinsurance Industry = 248
Lloyd's of London = 249
The History of Lloyd's = 249
How Lloyd's Works = 250
Lloyd's Current Problems = 250
The Insurance Industry = 251
The Economics of the Insurance Business = 251
The Structure of the Insurance Industry = 253
Public Policy and Regulation = 255
The Regulatory Framework = 255
Consumer Protection = 255
Rate Regulation and Availability = 256
Safety Regulation = 258
Promoting Competition = 259
Market Failure in the Provision of Insurance = 259
Catastrophe Insurance and Its Problems = 260
The Limitations of Conventional Insurance = 260
Alternative Approaches to Catastrophe Risk = 261
Summary = 262
Discussion Questions = 263
Bibliography = 264
Key Terms = 264
CHAPTER 10 Pension Plans and Mutual Funds = 265
Social Security = 266
The Nature of Social Security Programs = 266
How Social Security Programs Work = 267
The Problems of Social Security Programs = 267
Issues in Saving for Retirement = 268
Risk and Return = 268
The Importance of the Rate of Return = 268
Investment Risk = 269
Longevity Risk = 269
How the Financial System Can Help = 269
Economies of Scale, Pooling, and Risk Bearing = 270
Investment Management = 270
Dealing with Longevity Risk = 270
Tax Advantages = 271
Pension Plans = 273
The Evolution of Pension Plans = 273
Why Do Employers Sponsor Pension Plans? = 274
Defined Benefit Plans = 276
Defined Contribution Plans = 278
Cash Balance Plans = 279
The Management of Pension Funds = 280
The Regulation of Pension Plans = 281
Individual Retirement Plans = 283
Pension Plans Today = 284
Mutual Funds = 289
Investment Companies and Mutual Funds = 289
The Evolution of Mutual Funds = 290
Investment Objectives = 292
Organization and Management = 292
Types of Mutual Fund = 293
The Importance of Distribution = 294
Economies of Scale = 296
Consolidation = 296
The Regulation of Mutual Funds = 297
Hedge Funds = 297
Mutual Funds Today = 299
Summary = 300
Discussion Questions = 301
Bibliography = 302
Key Terms = 303
PART Ⅲ FINANCIAL MARKETS = 305
CHAPTER 11 Understanding Financial Markets = 307
What Do Financial Markets Do? = 308
A Picture of Financial Markets = 308
The Difficulties of External Financing = 312
The Primary Market and the Underwriting of New Issues = 315
The Risks and Rewards of Underwriting = 318
Increasing Competition in Underwriting = 318
The Secondary Market = 319
The Economic Role of Secondary Markets = 320
The Organization of Secondary Markets = 321
Securities Firms = 324
The Nature of the Business = 324
Investment Banking = 324
Brokerage = 325
Risk Management and Derivatives = 325
The Organization of a Securities Firm = 326
The Importance of People = 326
The Form of the Securities Firm = 326
Employee Risk = 327
The Securities Industry = 328
Globalization = 328
Deregulation = 328
Innovation = 329
The Growing Importance of Institutional Investors = 330
Increasing Competition = 331
Global Consolidation = 332
Summary = 335
Discussion Questions = 336
Bibliography = 337
Key Terms = 337
CHAPTER 12 The Market for Government Securities = 338
The History of the Government Securities Market = 340
Birth of the Market in Sixteenth-Century Europe = 340
Government Securities in the United States = 340
The Instruments of Government Debt = 341
The Evolution of Instruments of Government Debt = 341
Types of U.S. Government Debt = 342
Book-entry Securities = 344
Example 12.1 = 345
The Primary Market = 346
Reopenings346
Auction Procedures = 346
Example 12.2 = 347
The When-Issued Market = 348
Recent Changes in the Primary Market = 348
The Secondary Market = 349
How the Secondary Market Is Organized = 349
Dealers = 349
Brokers = 349
Electronic Trading = 351
Information = 352
Clearing and Settlement = 352
The Global Market for U.S. Government Securities = 353
How to Be a Securities Dealer = 354
Buying and Selling Securities = 354
The Bid-Asked Spread = 354
Carry and the Yield Curve = 355
Repurchase Agreements = 356
Trading Profits = 357
Taking a Short Position = 358
Reverse Repos = 358
Running a Book in Repos = 359
Hedging = 360
Regulation of the Government Securities Market = 362
Drysdale Government Securities = 362
E.S.M. and BBS = 362
Salomon Brothers = 363
The Regulatory Response = 364
Globalization of the Government Securities Market = 364
The Disappearing Government Security? = 365
Summary = 366
Discussion Questions = 367
Bibliography = 368
Key Terms368
CHAPTER 13 The Mortgage Market = 369
The Historical Background = 370
Origins = 370
Early Mortgage Lending in the United States = 370
S&Ls and the First S&L Crisis = 371
Government Intervention = 371
The Mortgage Instrument = 372
The Structure of the Cash Flow = 372
Lending Terms = 375
Prepayment and Refinancing = 375
The Weaknesses of Post-Depression Mortgage Finance = 376
Fragmentation of the Mortgage Market = 377
Interest Rate Risk for Financial Intermediaries = 377
The Second S&L Crisis = 377
The Demise of Regulation Q and Its Consequences = 378
Alternative Approaches to Mortgage Finance = 379
The Adjustable-Rate Mortgage = 379
Nondeposit Financing = 380
Securitization and the Secondary Market for Mortgages = 380
Obstacles to Long-Term Funding of Mortgages = 381
The Origins of the Secondary Market = 381
The Revival of Mortgage Banking = 382
Mortgage-Backed Securities = 383
The CMO, the REMIC, and the Strip = 385
Organization of the Market for Mortgage-Backed Securities = 388
The Benefits of Securitization = 389
The Mortgage Market Today = 389
Mortgage Brokers and the Internet = 389
The Controversial Role of the Mortgage Agencies = 391
Mortgage Markets in Other Countries = 391
Mortgage Lending by Banks and Thrifts = 392
Securitization and Secondary Markets = 393
Summary = 393
Discussion Questions = 394
Bibliography = 395
Key Terms = 395
CHAPTER 14 Debt Markets = 396
Ways to Control the Risk of Debt = 396
Credit Information = 396
The Debt Contract = 399
Security = 401
Financial Engineering = 403
Taking an Equity Stake = 403
Relationship Lending vs Arm's-Length Lending = 405
The Nature of Arm's-Length Lending = 405
The Nature of Relationship Lending = 406
The Bond Market = 408
Municipal Bonds = 408
Corporate Bonds = 409
The International Bond Market = 411
The Private Placement Market = 413
Syndicated Loans = 415
Junk Bonds = 415
The Money Market = 418
Commercial Paper = 418
Variations on Commercial Paper = 421
The International Money Market = 422
Securitization = 423
Asset-Liability Mismatch = 424
Avoiding Regulatory Costs = 424
The Benefits of Financial Engineering = 425
Avoiding Negative Credit Substitution = 427
Summary = 428
Discussion Questions = 429
Bibliography = 431
Key Terms = 431
CHAPTER 15 The Equity Market = 432
Corporate Governance = 433
The Nature of the Problem = 433
Legal Protection = 435
Monitoring by Interested Parties = 436
A Comparison of Corporate Governance Systems = 442
The Public Equity Market = 444
What Does the Public Equity Market Do? = 444
The Primary Market = 448
The Secondary Market = 450
The Importance of Information = 452
Private Equity = 453
Types of Private Equity Financing = 453
How Private Equity Works = 454
The Significance of Private Equity = 457
Summary = 459
Discussion Questions = 460
Bibliography = 461
Key Terms = 462
CHAPTER 16 The Derivatives Market : Futures, Options, and Swaps = 463
Futures = 464
Hedging with Futures : An Example = 464
The Futures Price = 467
How the Futures Market Works = 467
Basis Risk = 472
Types of Futures Contract = 473
Options = 476
Hedging with Options = 476
How the Options Market Works = 479
Types of Option Contract = 480
Swaps and Other OTC Derivatives = 481
Using Interest Rate Swaps = 483
Using a Swap to Lower Borrowing Costs = 483
The Swap as a Wager = 486
How the Swap Market Works = 487
Types of Swap = 489
Other OTC Derivatives = 491
Addressing Replacement Risk on OTC Derivatives = 493
Questions Raised by the Growth of Derivatives Markets = 493
Why Has the Market Exploded? = 493
Why Are There Both Exchange-Traded and OTC Instruments? = 495
Why Do Some Contracts Succeed and Others Not? = 498
Appendix : Pricing Derivative Securities = 499
Futures or Forward Prices = 499
Swap Prices = 500
Option Prices = 501
Summary = 501
Discussion Questions = 502
Bibliography = 503
Key Terms = 504
CHAPTER 17 The Organization of Financial Markets = 505
The Nature of Organized Markets = 506
A Typology of Organized Markets = 5o6
How Organized Markets Lower Trading Costs = 509
Trading in Organized Markets = 512
Methods of Trading = 512
Example 17.1 = 513
Example 17.2 = 516
The Importance of Credit = 520
Market Information = 521
Automated Trading Systems = 522
After the Trade = 525
The Risks of Trade Completion = 526
Understanding Clearing and Settlement = 527
Clearing and Settlement at the Retail Level = 535
Organized Markets Today = 535
Forces for Change = 535
Competition in U.S. Stock Markets = 538
Competition among European Stock Markets = 541
Competition among Derivatives Markets = 542
The Consequences of Competition = 544
Consolidation = 544
Summary = 545
Discussion Questions = 546
Bibliography = 547
Key Terms = 548
PART Ⅳ SAFETY AND REGULATION = 549
CHAPTER 18 Managing Liquidity and Risk = 551
Managing Liquidity = 552
How Large and Small Banks Manage Liquidity = 553
The Problems of Liability Management = 559
Managing a Bank's Reserves = 561
How Other Intermediaries Manage Liquidity = 563
Managing Market Risk = 565
The Nature of Interest Rate Risk = 566
Avoiding Interest Rate Risk = 567
Hedging Interest Rate Risk = 568
Measuring Overall Exposure = 573
Exchange Rate Risk = 576
How Much Market Risk? = 577
Market Risk and Nonbank Intermediaries = 578
Managing Credit Risk and Other Specific Risks = 580
Care in Lending and Realistic Pricing = 581
Diversification = 583
Participations, Syndications, and Securitization = 584
Hedging Credit Risk = 585
Capital = 586
Case Studies in the Management of Liquidity and Risk = 587
Case 1 : The LDC Loans = 588
Case 2 : Continental Illinois = 589
Case 3 : Long Term Capital Management = 589
Summary = 591
Discussion Questions = 592
Bibliography = 593
Key Terms = 593
CHAPTER 19 Bank Safety and Regulation = 594
Prudential Regulation = 595
Prudential Regulation in the United States = 595
Regulation of Offshore and Multinational Banking = 597
Liquidity Crises = 599
Bank Runs and Banking Panics = 599
Why Do Bank Runs and Banking Panics Happen? = 601
Banking Industry Structure and Stability = 602
New Methods of Managing Liquidity and Risk = 603
Private Solutions for Liquidity Crises = 604
The Clearinghouse Associations = 604
Private Guarantees = 606
A Lender of Last Resort = 607
The Origins of the Lender of Last Resort = 607
What a Lender of Last Resort Should Do = 608
The Fed as Lender of Last Resort = 609
The Discount Window = 611
Government Guarantees of Banks = 612
The Introduction of Federal Deposit Insurance = 612
Were the Opponents of Deposit Insurance Right? = 613
How Deposit Insurance Works = 613
What Happens When a Bank Fails? = 614
The U.S. Deposit Insurance Crisis = 616
Why Banks Became Riskier = 616
The Moral Hazard Problem = 617
The FDIC Cracks Down = 617
The S&L Mess : Moral Hazard at Its Worst = 619
Deposit Insurance in Other Countries = 621
Reducing the Cost of Moral Hazard = 623
Structural Reform = 623
Changing Bank Incentives = 623
The BIS Capital Standards = 625
The Consequences of Tighter Regulation = 627
Banks Respond to the New Capital Requirements = 627
The Effect on the Structure of the Financial System = 628
Where Do We Go from Here? = 630
More Regulation? = 630
A More Fundamental Rethinking = 631
Summary = 633
Discussion Questions = 634
Bibliography = 635
Key Terms = 636
CHAPTER 20 Security Market Regulation and Stability = 637
The Regulation of Securities Markets = 638
Why Regulate Securities Markets? = 638
The Structure of Regulation = 640
Regulating Issuers = 642
Regulating Trading = 643
Regulating Markets and Market Makers = 645
Regulating Money Managers = 647
Regulation in Other Countries : Two Different Approaches = 648
Globalization and Regulation = 649
Trends in Regulation = 649
The Stability of Securities Markets = 650
What Happens in a Crash? = 650
Understanding the Behavior of Traders = 653
Factors That Contribute to Market Instability = 654
What Can Be Done to Reduce Instability and Prevent Crashes? = 655
Surviving Market Crashes = 657
Summary = 658
Discussion Questions = 659
Bibliography = 659
Key Terms = 660
Name Index = 661
Subject Index = 663
Preface = xxiii
Introduction = xxv
About the Author = xxx
PART Ⅰ PRINCIPLES = 1
CHAPTER 1 Lending, Payments, and Trade in Risk = 3
Trade and the Gains from Trade = 4
Saving, Investment, and Lending = 4
Saving and Wealth = 4
Investment = 6
Gains to Trade in Borrowing and Lending = 7
Trade in Risk = 7
Insurance = 7
Forward Transactions = 8
The Difficulties of Trade = 10
Trade and Trust = 10
The Problems Involved in Lending = 10
The Problems of Trade in Risk = 14
The Common Pattern = 16
Summary = 17
Discussion Questions = 18
Bibliography = 19
Key Terms = 19
CHAPTER 2 The Financial System and Its Technology = 20
Payments = 21
Reducing the Costs of Payment in Cash = 21
Fractional Reserve Banking = 22
Lending = 24
Direct Lending and Financial Markets = 25
Indirect Lending and Financial Intermediaries = 28
Direct or Indirect Lending? = 30
Trade in Risk = 33
Insurance = 33
The Technology of the Financial System = 37
Delegation = 38
Credit Substitution = 38
Pooling = 39
Netting = 39
How Different Institutions Use the Basic Techniques = 40
Summary = 40
Discussion Questions = 41
Bibliography = 41
Key Terms = 42
CHAPTER 3 Efficiency, Stability, and Government Intervention = 43
Efficiency = 44
The Potential Gains from Lending = 44
Conditions for Efficiency in Lending = 47
Efficiency in Payments and in Trade in Risk = 50
Market Failure and Inefficiency = 51
Intervention to Promote Competition = 52
Intervention to Lower Costs = 53
Stability = 54
Bank Runs and Banking Panics = 54
Securities Market Crashes = 55
Price-Level Instability = 56
Market Failure and Instability = 57
Intervention to Promote Stability = 58
The Trade-off between Stability and Efficiency = 60
Regulation and Innovation = 61
Other Types of Government Intervention = 61
Consumer Protection = 61
Social Policy = 62
Government Failure = 62
Intervention Often Serves Special Interests = 62
Intervention Is Costly = 63
Intervention Often Does Not Work = 63
Summary = 64
Discussion Questions = 64
Key Terms = 65
CHAPTER 4 Interest Rates, Exchange Rates, and Security Prices = 66
Pricing Securities Promising a Single Payment = 67
Multiple Periods and Compounding = 68
Example 4.1 = 68
Example 4.2 = 69
The Compounding Period and the Effective Annual Rate = 69
Example 4.3 = 71
Pricing Securities Promising Multiple, Payments = 72
Bonds with Annual Coupons = 72
Example 4.4 = 74
Bonds with a Coupon Period of Less than a Year = 74
Example 4.5 = 74
Amortized Loans = 75
Example 4.6 = 75
Example 4.7 = 75
Example 4.8 = 76
Market Yield on a Security Promising Multiple Payments = 76
Example 4.9 = 77
Application : Understanding Treasury Listings = 78
Interest Rate Risk = 81
Interest Rate Risk on Securities Promising a Single Payment = 82
Example 4.10 = 84
Interest Rate Risk on Securities Promising Multiple Payments = 85
Example 4.11 = 87
Example 4.12 = 88
Exchange Rate Risk = 89
Example 4.13 = 89
Monetary Expansion and Prices = 91
Real and Nominal Values = 93
A Measure of Prices = 93
Measuring in Constant Dollars = 94
Real and Nominal Interest Rates = 95
Adjusting to Inflation = 96
Summary = 99
Discussion Questions = 99
Key Terms = 100
PART Ⅱ INTERMEDIARIES = 100
CHAPTER 5 Understanding Financial Intermediaries = 103
You Open a Bank = 104
Balance Sheets and T-Accounts = 104
Profits and Return on Equity = 106
Ways to Increase Return on Equity = 108
Setting Rates on Deposits and Loans = 108
The Competitive Environment = 109
Asymmetric Information and Adverse Selection = 109
The Risk-Return Trade-off = 110
Deposits, Reserves, and Liquidity = 111
Increasing Deposits = 111
Reducing Reserves = 111
Why a Bank Needs Liquidity = 112
Asset Management and Liability Management = 112
Equity and Solvency = 113
Equity and ROE = 113
Equity and Risk = 114
Economies of Scale and Scope = 117
Economies of Scale = 119
Economies of Scope = 123
Banks and Other Intermediaries = 123
Summary = 125
Discussion Questions = 126
Key Terms = 127
CHAPTER 6 What Is a Bank? = 128
The Evolution of the Modern Bank = 129
Banking in Europe = 129
Banking in England = 132
Banking in America = 134
Near Banks = 135
The Pattern of Bank Evolution = 141
The Evolution of Bank Assets = 142
Commercial Lending = 142
Lending to Noncommercial Borrowers = 148
The Evolution of Bank Liabilities = 149
Checking Deposits, Banknotes, and Time Deposits = 150
Interbank Deposits = 150
Interest Rate Restrictions and the Revolution in Bank Liabilities = 151
Innovations in Consumer Deposits = 155
The Evolution of Bank Activities = 156
Economies of Scope Related to Payments = 156
Economies of Scope Related to Intermediation = 156
Economies of Scope in Marketing = 159
Regulatory Obstacles to the Expansion of Bank Activities = 160
The United States = 160
Other Countries = 163
Europe = 163
Japan = 164
The Decline of the Bank? = 164
Summary = 166
Discussion Questions = 167
Bibliography = 168
Key Terms = 168
CHAPTER 7 The Banking Industry = 169
The History of the Banking Industry = 170
Three Key Factors in the Evolution of the Banking Industry = 170
Economies of Scale between Banks : Correspondents and Money Markets = 173
Consolidation in England and the Advantages of Branch Banking = 175
Consolidation in the United States = 177
Living with Branching Restrictions = 178
Getting Around Branching Restrictions = 178
The Movement towards Interstate Banking = 180
International Banking = 182
Reasons for the Expansion of International Banking = 182
Multinational Banking = 184
Offshore Banking : The Eurocurrency Market = 186
The Implications of Banking Consolidation = 191
The Implications of Consolidation for the Banking Industry = 191
The Implications of Consolidation for Bank = Customers = 194
Summary = 196
Discussion Questions = 197
Bibliography = 198
Key Terms = 198
CHAPTER 8 Payments and Foreign Exchange = 199
The Different Types of Money = 200
Fed Dollars = 200
Bank Dollars = 202
Checks = 202
The Check-Clearing System = 203
Check Enhancements = 204
Special Checks = 204
Giro Payments = 205
Credit Cards = 206
The Store Credit Card = 206
The Third-Party Card = 206
The Four-Party Card = 207
Delayed Debit Cards = 207
Electronic Payments = 208
Online Electronic Payments : Fedwire and CHIPS = 208
Automated Clearinghouses(ACHs) = 210
Electronic Debit Cards : ATMs and EFTPOS = 211
Payment on the Internet = 213
The Use of Different Methods of Payment = 213
Different Payments Methods for Different Transactions = 213
An International Comparison of Payment Patterns = 213
Why Payment Patterns Differ = 214
Foreign Exchange = 217
The Problem of Different Clearing Systems = 217
A Foreign Exchange Transaction = 218
"Domestic Exchange" = 218
The Foreign Exchange Market = 219
Growth of the Market = 219
How the Market Works = 219
The Payments System and Public Policy = 221
Efficiency of the Payments System = 221
The Importance of Stability in the Value of Money = 223
Stability of the Payments System = 224
Summary = 225
Discussion Questions = 226
Bibliography = 227
Key Terms = 227
CHAPTER 9 Insurance = 228
The Economics of Insurance = 229
Pricing of Premiums = 229
Marketing = 231
Incentive Problems = 232
Life Insurance = 234
The Evolution of Life Insurance in the United States = 235
Life Insurance Policies = 237
Retirement-Related Products = 240
Health Insurance = 241
Life Insurance Assets and Liabilities = 242
Property-Liability Insurance = 243
The Evolution of Property-Liability Insurance = 243
The Property-Liability Business = 244
Property-Liability Insurance Today = 247
Reinsurance = 247
The Function of Reinsurance = 247
The Reinsurance Treaty = 248
The Reinsurance Industry = 248
Lloyd's of London = 249
The History of Lloyd's = 249
How Lloyd's Works = 250
Lloyd's Current Problems = 250
The Insurance Industry = 251
The Economics of the Insurance Business = 251
The Structure of the Insurance Industry = 253
Public Policy and Regulation = 255
The Regulatory Framework = 255
Consumer Protection = 255
Rate Regulation and Availability = 256
Safety Regulation = 258
Promoting Competition = 259
Market Failure in the Provision of Insurance = 259
Catastrophe Insurance and Its Problems = 260
The Limitations of Conventional Insurance = 260
Alternative Approaches to Catastrophe Risk = 261
Summary = 262
Discussion Questions = 263
Bibliography = 264
Key Terms = 264
CHAPTER 10 Pension Plans and Mutual Funds = 265
Social Security = 266
The Nature of Social Security Programs = 266
How Social Security Programs Work = 267
The Problems of Social Security Programs = 267
Issues in Saving for Retirement = 268
Risk and Return = 268
The Importance of the Rate of Return = 268
Investment Risk = 269
Longevity Risk = 269
How the Financial System Can Help = 269
Economies of Scale, Pooling, and Risk Bearing = 270
Investment Management = 270
Dealing with Longevity Risk = 270
Tax Advantages = 271
Pension Plans = 273
The Evolution of Pension Plans = 273
Why Do Employers Sponsor Pension Plans? = 274
Defined Benefit Plans = 276
Defined Contribution Plans = 278
Cash Balance Plans = 279
The Management of Pension Funds = 280
The Regulation of Pension Plans = 281
Individual Retirement Plans = 283
Pension Plans Today = 284
Mutual Funds = 289
Investment Companies and Mutual Funds = 289
The Evolution of Mutual Funds = 290
Investment Objectives = 292
Organization and Management = 292
Types of Mutual Fund = 293
The Importance of Distribution = 294
Economies of Scale = 296
Consolidation = 296
The Regulation of Mutual Funds = 297
Hedge Funds = 297
Mutual Funds Today = 299
Summary = 300
Discussion Questions = 301
Bibliography = 302
Key Terms = 303
PART Ⅲ FINANCIAL MARKETS = 305
CHAPTER 11 Understanding Financial Markets = 307
What Do Financial Markets Do? = 308
A Picture of Financial Markets = 308
The Difficulties of External Financing = 312
The Primary Market and the Underwriting of New Issues = 315
The Risks and Rewards of Underwriting = 318
Increasing Competition in Underwriting = 318
The Secondary Market = 319
The Economic Role of Secondary Markets = 320
The Organization of Secondary Markets = 321
Securities Firms = 324
The Nature of the Business = 324
Investment Banking = 324
Brokerage = 325
Risk Management and Derivatives = 325
The Organization of a Securities Firm = 326
The Importance of People = 326
The Form of the Securities Firm = 326
Employee Risk = 327
The Securities Industry = 328
Globalization = 328
Deregulation = 328
Innovation = 329
The Growing Importance of Institutional Investors = 330
Increasing Competition = 331
Global Consolidation = 332
Summary = 335
Discussion Questions = 336
Bibliography = 337
Key Terms = 337
CHAPTER 12 The Market for Government Securities = 338
The History of the Government Securities Market = 340
Birth of the Market in Sixteenth-Century Europe = 340
Government Securities in the United States = 340
The Instruments of Government Debt = 341
The Evolution of Instruments of Government Debt = 341
Types of U.S. Government Debt = 342
Book-entry Securities = 344
Example 12.1 = 345
The Primary Market = 346
Reopenings346
Auction Procedures = 346
Example 12.2 = 347
The When-Issued Market = 348
Recent Changes in the Primary Market = 348
The Secondary Market = 349
How the Secondary Market Is Organized = 349
Dealers = 349
Brokers = 349
Electronic Trading = 351
Information = 352
Clearing and Settlement = 352
The Global Market for U.S. Government Securities = 353
How to Be a Securities Dealer = 354
Buying and Selling Securities = 354
The Bid-Asked Spread = 354
Carry and the Yield Curve = 355
Repurchase Agreements = 356
Trading Profits = 357
Taking a Short Position = 358
Reverse Repos = 358
Running a Book in Repos = 359
Hedging = 360
Regulation of the Government Securities Market = 362
Drysdale Government Securities = 362
E.S.M. and BBS = 362
Salomon Brothers = 363
The Regulatory Response = 364
Globalization of the Government Securities Market = 364
The Disappearing Government Security? = 365
Summary = 366
Discussion Questions = 367
Bibliography = 368
Key Terms368
CHAPTER 13 The Mortgage Market = 369
The Historical Background = 370
Origins = 370
Early Mortgage Lending in the United States = 370
S&Ls and the First S&L Crisis = 371
Government Intervention = 371
The Mortgage Instrument = 372
The Structure of the Cash Flow = 372
Lending Terms = 375
Prepayment and Refinancing = 375
The Weaknesses of Post-Depression Mortgage Finance = 376
Fragmentation of the Mortgage Market = 377
Interest Rate Risk for Financial Intermediaries = 377
The Second S&L Crisis = 377
The Demise of Regulation Q and Its Consequences = 378
Alternative Approaches to Mortgage Finance = 379
The Adjustable-Rate Mortgage = 379
Nondeposit Financing = 380
Securitization and the Secondary Market for Mortgages = 380
Obstacles to Long-Term Funding of Mortgages = 381
The Origins of the Secondary Market = 381
The Revival of Mortgage Banking = 382
Mortgage-Backed Securities = 383
The CMO, the REMIC, and the Strip = 385
Organization of the Market for Mortgage-Backed Securities = 388
The Benefits of Securitization = 389
The Mortgage Market Today = 389
Mortgage Brokers and the Internet = 389
The Controversial Role of the Mortgage Agencies = 391
Mortgage Markets in Other Countries = 391
Mortgage Lending by Banks and Thrifts = 392
Securitization and Secondary Markets = 393
Summary = 393
Discussion Questions = 394
Bibliography = 395
Key Terms = 395
CHAPTER 14 Debt Markets = 396
Ways to Control the Risk of Debt = 396
Credit Information = 396
The Debt Contract = 399
Security = 401
Financial Engineering = 403
Taking an Equity Stake = 403
Relationship Lending vs Arm's-Length Lending = 405
The Nature of Arm's-Length Lending = 405
The Nature of Relationship Lending = 406
The Bond Market = 408
Municipal Bonds = 408
Corporate Bonds = 409
The International Bond Market = 411
The Private Placement Market = 413
Syndicated Loans = 415
Junk Bonds = 415
The Money Market = 418
Commercial Paper = 418
Variations on Commercial Paper = 421
The International Money Market = 422
Securitization = 423
Asset-Liability Mismatch = 424
Avoiding Regulatory Costs = 424
The Benefits of Financial Engineering = 425
Avoiding Negative Credit Substitution = 427
Summary = 428
Discussion Questions = 429
Bibliography = 431
Key Terms = 431
CHAPTER 15 The Equity Market = 432
Corporate Governance = 433
The Nature of the Problem = 433
Legal Protection = 435
Monitoring by Interested Parties = 436
A Comparison of Corporate Governance Systems = 442
The Public Equity Market = 444
What Does the Public Equity Market Do? = 444
The Primary Market = 448
The Secondary Market = 450
The Importance of Information = 452
Private Equity = 453
Types of Private Equity Financing = 453
How Private Equity Works = 454
The Significance of Private Equity = 457
Summary = 459
Discussion Questions = 460
Bibliography = 461
Key Terms = 462
CHAPTER 16 The Derivatives Market : Futures, Options, and Swaps = 463
Futures = 464
Hedging with Futures : An Example = 464
The Futures Price = 467
How the Futures Market Works = 467
Basis Risk = 472
Types of Futures Contract = 473
Options = 476
Hedging with Options = 476
How the Options Market Works = 479
Types of Option Contract = 480
Swaps and Other OTC Derivatives = 481
Using Interest Rate Swaps = 483
Using a Swap to Lower Borrowing Costs = 483
The Swap as a Wager = 486
How the Swap Market Works = 487
Types of Swap = 489
Other OTC Derivatives = 491
Addressing Replacement Risk on OTC Derivatives = 493
Questions Raised by the Growth of Derivatives Markets = 493
Why Has the Market Exploded? = 493
Why Are There Both Exchange-Traded and OTC Instruments? = 495
Why Do Some Contracts Succeed and Others Not? = 498
Appendix : Pricing Derivative Securities = 499
Futures or Forward Prices = 499
Swap Prices = 500
Option Prices = 501
Summary = 501
Discussion Questions = 502
Bibliography = 503
Key Terms = 504
CHAPTER 17 The Organization of Financial Markets = 505
The Nature of Organized Markets = 506
A Typology of Organized Markets = 5o6
How Organized Markets Lower Trading Costs = 509
Trading in Organized Markets = 512
Methods of Trading = 512
Example 17.1 = 513
Example 17.2 = 516
The Importance of Credit = 520
Market Information = 521
Automated Trading Systems = 522
After the Trade = 525
The Risks of Trade Completion = 526
Understanding Clearing and Settlement = 527
Clearing and Settlement at the Retail Level = 535
Organized Markets Today = 535
Forces for Change = 535
Competition in U.S. Stock Markets = 538
Competition among European Stock Markets = 541
Competition among Derivatives Markets = 542
The Consequences of Competition = 544
Consolidation = 544
Summary = 545
Discussion Questions = 546
Bibliography = 547
Key Terms = 548
PART Ⅳ SAFETY AND REGULATION = 549
CHAPTER 18 Managing Liquidity and Risk = 551
Managing Liquidity = 552
How Large and Small Banks Manage Liquidity = 553
The Problems of Liability Management = 559
Managing a Bank's Reserves = 561
How Other Intermediaries Manage Liquidity = 563
Managing Market Risk = 565
The Nature of Interest Rate Risk = 566
Avoiding Interest Rate Risk = 567
Hedging Interest Rate Risk = 568
Measuring Overall Exposure = 573
Exchange Rate Risk = 576
How Much Market Risk? = 577
Market Risk and Nonbank Intermediaries = 578
Managing Credit Risk and Other Specific Risks = 580
Care in Lending and Realistic Pricing = 581
Diversification = 583
Participations, Syndications, and Securitization = 584
Hedging Credit Risk = 585
Capital = 586
Case Studies in the Management of Liquidity and Risk = 587
Case 1 : The LDC Loans = 588
Case 2 : Continental Illinois = 589
Case 3 : Long Term Capital Management = 589
Summary = 591
Discussion Questions = 592
Bibliography = 593
Key Terms = 593
CHAPTER 19 Bank Safety and Regulation = 594
Prudential Regulation = 595
Prudential Regulation in the United States = 595
Regulation of Offshore and Multinational Banking = 597
Liquidity Crises = 599
Bank Runs and Banking Panics = 599
Why Do Bank Runs and Banking Panics Happen? = 601
Banking Industry Structure and Stability = 602
New Methods of Managing Liquidity and Risk = 603
Private Solutions for Liquidity Crises = 604
The Clearinghouse Associations = 604
Private Guarantees = 606
A Lender of Last Resort = 607
The Origins of the Lender of Last Resort = 607
What a Lender of Last Resort Should Do = 608
The Fed as Lender of Last Resort = 609
The Discount Window = 611
Government Guarantees of Banks = 612
The Introduction of Federal Deposit Insurance = 612
Were the Opponents of Deposit Insurance Right? = 613
How Deposit Insurance Works = 613
What Happens When a Bank Fails? = 614
The U.S. Deposit Insurance Crisis = 616
Why Banks Became Riskier = 616
The Moral Hazard Problem = 617
The FDIC Cracks Down = 617
The S&L Mess : Moral Hazard at Its Worst = 619
Deposit Insurance in Other Countries = 621
Reducing the Cost of Moral Hazard = 623
Structural Reform = 623
Changing Bank Incentives = 623
The BIS Capital Standards = 625
The Consequences of Tighter Regulation = 627
Banks Respond to the New Capital Requirements = 627
The Effect on the Structure of the Financial System = 628
Where Do We Go from Here? = 630
More Regulation? = 630
A More Fundamental Rethinking = 631
Summary = 633
Discussion Questions = 634
Bibliography = 635
Key Terms = 636
CHAPTER 20 Security Market Regulation and Stability = 637
The Regulation of Securities Markets = 638
Why Regulate Securities Markets? = 638
The Structure of Regulation = 640
Regulating Issuers = 642
Regulating Trading = 643
Regulating Markets and Market Makers = 645
Regulating Money Managers = 647
Regulation in Other Countries : Two Different Approaches = 648
Globalization and Regulation = 649
Trends in Regulation = 649
The Stability of Securities Markets = 650
What Happens in a Crash? = 650
Understanding the Behavior of Traders = 653
Factors That Contribute to Market Instability = 654
What Can Be Done to Reduce Instability and Prevent Crashes? = 655
Surviving Market Crashes = 657
Summary = 658
Discussion Questions = 659
Bibliography = 659
Key Terms = 660
Name Index = 661
Subject Index = 663