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Why Banks?

Microeconomic Foundations of Financial Intermediaries


Ilonka Rühle

In the banking literature the existence of financial intermediaries is generally explained in terms of the transformation of risks, terms and lot-sizes. Yet these functions could also be performed by system of perfect and complete markets. Therefore, the approach taken in Why Banks? is to start by investigating the conditions that, in the real world, render markets imperfect and incomplete, namely asymmetric information distribution and uncertainty. Incentive compatible financing instruments (standard debt contracts as well as equity participation) provide a means of solving these problems. Financial intermediaries ultimately owe their existence to their ability to save transaction costs using these instruments and to solve problems relating to the enforcement of contracts.


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Acknowledgements XV


Acknowledgements The present study was accepted as a doctoral thesis in June 1993 by the Department of Economics and Business Administration of Johann Wolfgang Goethe University, Frankfurt, Germany. Its original title was: Zur mikrookonomischen BegrOndung von Finanzintermediaren: Warum gibt es Banken? The Department gave permission for the thesis to be published in English translation. The original German text is available for viewing at the Department. "The first sentence is always the hardest," so they say. I would like to take this opportunity to express my gratitude to all those who helped me overcome this hurdle, and many later ones. Among them are my doctoral supervisor, Professor Roland Eisen, who first drew my attention to the economics of information and encouraged me to take an intensive interest in the issues involved. I would also like to thank Professor Reinhard H. Schmidt, not only for agreeing to be the co-assessor of my thesis, but also for the exceptional measure of support he provided in connection with the publication of this study. Both were always willing to listen to my questions. This thesis would probably never have been written had it not been for the constant reassurance and energetic assistance I received from Dr. Renate Neubaumer and Sigried Caspar. It would be impossible to name all of the people who lent me their support and encouragement, yet it would be equally impossible not to name at least some of them. Martin Godemann, Dr. Uti Hege, Marion Kneesch, Prof. Jan P. Krahnen, Sabine Kunz,...

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