These slides about a research paper.

1. Banking Theories and
Macroeconomics
By
A. Bianco and Claudio Sardoni
Sapienza University of Rome
Presented by:
Muhammad Awais Khan- 41050
Muhammad Awais Zameer- 41012
Syed Muhammad Abdul Basit – 41005
Shafqat Rasool- 41015
Nawaz Khan - 41053
Presented to:
Dr. Jahanzaib Sultan
GC. University Faisalabad

2. 1) INTRODUCTION:
• Banks role played in building private debts for money creation before
Great financial Crises 2008.
• The view of renewing interest rate is important in financial market
developments for real economy is new mainstream economics.
• Such developments represent progress in current economic theory,
mostly focused on business & financial cycle.
• There is a long way for common approach to macro financial
modelling.
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3. Contd..
• Head of monetary and economic department at bank for
international settlements, Claudio Borio “ New models of financial
cycle are based on traditional modelling strategies”.
• The he given some arguments to address issues where mainstream is
failed:
a) Fluctuations in macroeconomy are resulted from endogenous forces.
b) Busts are because of stock disequilibria in the economy
c) Potential output & sustainable output need to be marked out.
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4. Contd..
• There should be taken methodological changes in macroeconomics:
• The introduction of state-varying risk tolerance.
• The strong decisions on monetary policy of economy.
• According to borio suggestions for banking system is “ the careful
planning of banking regulations.
• Kohn (1986) arguments:
• About Post-Keynesian perspective over banking involves major
adjustments to traditional policy.
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5. Contd..
• Basic features of Neo-Keynesian DSGE models:
a) Theoretical motivation for embodying credit relation into macro
model.
b) Characterization of function of financial intermediary and banking
institutions.
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6. 2) Credit, Finance and Banking in recent
Macroeconomics:
2.1) Some Representative Mainstream Models:
• The study of credit markets and their interrelation grew significantly
after GFC 2007-8.
• Now analysts are conscious that their work was failed in giving
attention towards their relation.
• Two significant pre crises contribution were by,
a) Kiyotaki and Moore (1997)
b) Bernanke et al. (1999)
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7. Contd..
Models:
• New-Keynesian Dynamic Stochastic General Equilibrium(DSGE model)
• A modern method in macroeconomics that attempts to explain economic
phenomena.
• Bernanke et al (1999)
• Studied the role of imperfections in financial markets.
• Their model assumption is that both amount and cost(external finance
premium) of borrowed funds depends upon entrepreneur’s net worth.
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8. Contd..
• Eggertsson and Krugman (2012)
• Focused on the role of borrower’s frictions.
• This model analyze the effects by changing borrower’s debt limit.
• Decrease in debt limit decreases the borrower’s leverage (interest rate)
• Too much decrease in debt limit can raise to liquidity trap.
• Woodford (2010)
• Gives special importance to financial frictions.
• World without frictions.
• In real world
• Constraints on intermediaries accelerate business cycle.
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9. Contd..
Now we will consider some models that analyze financial
sector in more detail,
• Boissay et al. (2016)
• Considers banks are heterogenous in efficiency (cost of intermediation) and
are like frictions.
• In the interbank market.
• In frictionless world.
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10. Contd..
• Carlin and Soskice (2015)
• Carried out analysis of financial sector by considering 2 type of banking
activities in their new edition book.
• Commercial banking
• Connected with risk aversion
• Investment banking
• Connected with risk neutrality.
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11. Contd..
Other more detailed and
complex contributions:
• Adrian and Shin (2011)
• Shows that how the existence of
levered intermediaries drives the
business cycle, requires different
treatments of monetary policy.
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12. Contd..
• Gertler et al. (2011)
• Analyze the role of
Shadow Banking.
• They call it Whole Sale
Banking.
• Arguing that it is the
sector that is at center
stage of financial crisis
while retail banks
remain stable here.
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13. 13
Shadow Banking:

14. 2.2) Banks as intermediaries and the theory of
loanable funds:
• Retail as well as investment banks play as a role of intermediaries.
• Financial intermediaries borrow from somebody in order to lend.
• Retail bank borrow from household.
• Investment bank borrow from financial institution.
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15. Contd..
• Tobin’s objective was to reject the idea that banks are able to create
money out of ‘’Thin air’’.
• For Tobin’s saving allocation depends upon the relative yield of
deposit and assets.
• If the yield of non deposit assets falls then investment and lending
opportunity available to bank decline.
• Cost of external finance is higher than the cost of internal finance.
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16. 3) The IOM Banking Theory:
• Relation of a Money base currency and Central Bank reserve.
• Theory of deposit multiplayer and money multiplayer.
• Loanable funds no one can refuse to accept in either in interbank
transaction and non-interbank transaction.
• Base money is also called a outside money.
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17. Contd..
• Banks are seen as deposit taking financial institution.
• Banks are obligated to maintain reserve against their liability (vault
cash) at central bank.
• Bank lend out ‘’excess’’ reserve and take possession of a final
borrower ‘s promise to pay called ‘loan’
• Borrowed fund eventually re-borrowed by the bank and a
intermediation cycle start.
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18. 4) The OIM view of banks:
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• Deposits are not endowments that precede loan formation.
• Credit creation theory.

19. Contd..
• The process of origination of inside money is the same as outside
money.
• A bank lending transaction consist in the swap.
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20. Contd..
• Debtor-Debtor relation: mutual indebtedness relation between
“lender and borrower “.
• One can only originate or create her own liabilities.
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21. Banks can manage the liquidity risk in several
way:
• Bank Mergers
• Interbank borrowing
• Originate to hold deposits
• Originate to distributes debt security
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22. 5) Theoretical and policy implication:
• Recent experience has given an extraordinary impetus to research on
financial factors at play macroeconomic dynamics.
• The IOM theory rules that out by its root hypothesis that banks can
only make loans out of excess reserves.
• The public confidence in the bank-based payment system is necessary
supply of base money is to be endogenous.
• The central bank is not likely to lose monetary control unless those
assets are so troubled that their value is sufficient only for draining
too little of the reseves created to purchase them.
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23. Contd..
• Negative interest rates because do not lead to an acceleration of
money circulation velocity.
• Bank are not mere intermediaries that transfer resources from one
sector to another.
• The role of banks contributes better understanding of the aggregate
and sectoral distortion that arise in the real economy.
• Interest rate policies both direct and indirectly monetry policy can
significantly impact on the cost to manage liquidity risk.
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24. Here SYMMETRY:
• [Balance sheet policies] the central bank keeps asset prices higher
than they would otherwise be and makes bank more liquid then they
would be.
• Monetary policy is generally supposed to channel through the real
economy via the influence on both the cost and the available of loan
funds[bank reserves].
• The demand for deposits depends on services, as well as interest that
the bank may offer and also depend on risk of the bank becoming
insolvent or defaulting.
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