13. Banking: Successes and Failures

Financial Markets (ECON 252)
Banks, which were first created in primitive form by goldsmiths hundreds of years ago, have evolved into central economic institutions that manage the allocation of resources, channel information about productive activities, and offer the public convenient investment vehicles. Although there are several types of banking institutions, including credit unions and Saving and Loan Associations, commercial banks are the largest and most important in the banking system. Banks are designed to address three significant problems in capital markets: adverse selection, moral hazard, and liquidity. Banks make money by borrowing long and lending short and use fractional reserves to lend more funds than are deposited. History has seen numerous problems in banks, including bank runs and insolvency. Government support and regulation, such as those implemented via the Basel Accord, as well as rating agencies help to ensure that investors trust the banks with which they have relations.
00:00 - Chapter 1. On Andrew Redleaf: Reaping Rewards from Opportunities
11:06 - Chapter 2. The Origin of Banks, from Goldsmiths to Commercial Banks
25:29 - Chapter 3. Why Banks Exist: On Adverse Selection, Moral Hazard and Liquidity
37:15 - Chapter 4. Rating Agencies: Do They Work?
44:08 - Chapter 5. The Ongoing Fragility of Banks and Structures of Bank Regulation
58:17 - Chapter 6. The Subprime Crisis in the U.S. and in Europe
Complete course materials are available at the Open Yale Courses website: open.yale.edu/courses
This course was recorded in Spring 2008.