The Economics of Banking

THE ECONOMICS OF BANKING

THE ECONOMICS
OF BANKING
KENT MATTHEWS
and
JOHN THOMPSON

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Library of Congress Cataloging-in-Publication Data
Matthews, Kent.
The economics of banking / Kent Matthews, John Thompson.
p. cm.
Includes bibliographical references and index.
ISBN 0-470-09008-1 (pbk. : alk. paper)
1. Banks and banking. 2. Microeconomics. I. Thompson, John L. II. Title.
HG1601.M35 2005
332.1ödc22 2005004184
British Library Cataloguing in Publication Data
A catalogue record for this book is available from the British Library
ISBN-13 978-0-470-09008-4
ISBN-10 0-470-09008-1
Project management by Originator, Gt Yarmouth, Norfolk (typeset in 10/12pt Bembo)
Printed and bound in Great Britain by Antony Rowe Ltd, Chippenham, Wiltshire
This book is printed on acid-free paper responsibly manufactured from sustainable forestry
in which at least two trees are planted for each one used for paper production.

TABLE OF CONTENTS
About the Authors vii
Preface ix
1. Trends in Domestic and International Banking 1
2. Financial Intermediation: The Impact of the Capital Market 19
3. Banks and Financial Intermediation 33
4. Retail and Wholesale Banking 51
5. International Banking 63
6. The Theory of the Banking Firm 77
7. Models of Banking Behaviour 91
8. Credit Rationing 113
9. Securitization 129
10. The Structure of Banking 141
11. Bank Regulation 161
12. Risk Management 183
13. The Macroeconomics of Banking 205
References 225
Index 233

ABOUT THE AUTHORS
Kent Matthews received his economics training at the London School of
Economics, Birkbeck College and the University of Liverpool, receiving his PhD
for Liverpool in 1984. He is currently the Sir Julian Hodge Professor of Banking
and Finance at Cardi¡ Business School, Cardi¡ University. He has held research
appointments at the National Institute of Economic and Social Research, Bank of
England and Lombard Street Research Ltd and faculty positions at the Universities
of Liverpool, Western Ontario, Leuven, Liverpool John Moores and Humbolt. He
is the author and co-author of six books and over 60 articles in scholarly journals
and edited volumes.
John Thompson worked in industry until 1967 when he joined Liverpool
John Moores University (then Liverpool Polytechnic) as an assistant lecturer in
Economics. He took degrees in Economics at the University of London and the
University of Liverpool and obtained his PhD from the latter in 1986. He was
appointed to a personal chair in Finance becoming Professor of Finance in 1995 and
then in 1996 Emeritus Professor of Finance. He is the author and co-author of nine
books and numerous scholarly papers in the area of Finance and Macroeconomics.