A general model of the banking firm under conditions of monopoly, uncertainty, and recourse

Eliezer Z. Prisman, Myron B. Slovin, Marie Sushka

Research output: Contribution to journalArticle

28 Scopus citations

Abstract

We develop a stochastic programming model of the monopolistic competition banking firm. It assumes the bank faces a downward-sloping loan demand curve and is a price taker in securities markets. Uncertainty and liquidity requirements are incorporated. Bank decisions are made within a two-stage framework where realized disturbances that violate constraints can be rectified ex post at a cost. The results are: (1) Optimal loan and deposit rates are positive functions of the recourse penalty. (2) Asset/liability decisions are interdependent and elastically supplied deposits lower the loan rate. (3) The effect of uncertainty depends upon the penalty rate level.

Original languageEnglish (US)
Pages (from-to)293-304
Number of pages12
JournalJournal of Monetary Economics
Volume17
Issue number2
DOIs
StatePublished - Mar 1986

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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