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

Authors: Demetri Kantarelis

Addresses: Department of Economics and Global Studies, Assumption College, 500 Salisbury Street, Worcester, MA 01609, USA

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.

DOI: 10.1504/IJBCRM.2010.035686

International Journal of Business Continuity and Risk Management, 2010 Vol.1 No.3, pp.222 - 232

Published online: 02 Oct 2010 *

Full-text access for editors Full-text access for subscribers Purchase this article Comment on this article