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BANKING, chapters 1-6, 18: intro + interest rates, forex, chapters 8-10:…

- - - - tools: production of information- monitoring (costly state verification); government regulation to increase information; financial intermediation (venture-capital firms, private-equity firms); debt contracts
    - - tools: private production and sale of information (!!! free-rider problem); government regulation to increase information; financial intermediation; collateral or net worth (= assets - liabilities)
    - - tools: collateral and net worth (—> incentive-compatible); monitoring and enforcement of restrictive covenants; financial intermediation
  - - - in the case of a bank failure, depositors would have to wait until the bank is liquidated to get their deposit funds (and would only get a fraction of the value of their deposits) which explains the reluctancy to put money in banks
        depositors' lack of info could lead to a bank panic which will result in the simultaneous failure of many banks
        —> the need for a government safety net
      - deposit insurance guarantees that depositors will be paid off in full if the bank fails
        2 primary ways to handle a failed bank: (1) the payoff method, (2) the purchase and assumption method
        other forms of safety net are to lend from central banks to troubled institutions ("lender of last resort") or to nationalise troubled institutions
      - drawbacks: moral hazard, adverse selection, "too big to fail", financial consolidation