The banking firm: theoretical principles and their violations in the USA

Demetri Kantarelis

International Journal of Business Continuity and Risk Management, 2010, vol. 1, issue 3, 222-232

Abstract: The purpose of this paper is to describe a simplified model of the banking firm and contrast its theoretical principles against data from the recent financial crisis especially as it relates to sub-prime lending in the USA. The model presented does not include all aspects of lending; it primarily focuses on 'originate-to-distribute' mortgage loans to the exclusion of other. The proposed theory of the banking firm and the comparison of its principles against performance data may serve as a guide to reforming lending institutions in the wake of the recent financial crisis. The paper contributes, primarily, to pedagogy: it proposes a simplified theory of the banking firm which captures the bare essentials of banking. Additionally, it points-out that the 'originate-to-distribute' banking malaise was one of the drivers of the recent financial crisis but not its root cause.

Keywords: theory of the firm; principal agent; banking; financial crisis; USA; United States; sub-prime lending; mortgage loans; originate-to-distribute. (search for similar items in EconPapers)
Date: 2010
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