Uncertainty, Information, and Trust in Banking Intermediation

Enzo Dia

No 130, Working Papers from University of Milano-Bicocca, Department of Economics

Abstract: Banking intermediaries help to coordinate different agents’ plans, reducing the uncertainty that might otherwise hamper transactions because of disruptive “lemon” problems. By establishing trust relationships based on private information, banks allow risk pooling and provide insurance to different classes of agents, act as market makers, and provide services that save transaction and notary costs. “Lemon” problems are also important to understand the difference between market pricing of the risk of bonds and the banks’ pricing of the risk of loans. In the first case risk is priced on the basis of freely available information, relying heavily on the informational content of statistical time series. The resulting equilibria, though, are fragile, because they are subject to abrupt regime changes as new information becomes public. Banks, on the contrary, price loans on the basis of their private information, and they can thus provide insurance against different kinds of shocks. Given the opacity of their activities, and the huge externalities that their entrepreneurial choices imply, banks must be subject to an extensive regulation, imposing a transparent disclosure of their risk taking activities.

Keywords: Banks; Credit; Uncertainty; Information Costs; Trust (search for similar items in EconPapers)
Pages: 21 pages
Date: 2007-11, Revised 2007-11
New Economics Papers: this item is included in nep-ban and nep-upt
References: Add references at CitEc
Citations:

Downloads: (external link)
http://repec.dems.unimib.it/repec/pdf/mibwpaper130.pdf First version, 2007 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:mib:wpaper:130

Access Statistics for this paper

More papers in Working Papers from University of Milano-Bicocca, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Matteo Pelagatti ().