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

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

doi:10.1016/0304-3932(86)90033-4

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

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

Finance

Research output: Contribution to journal › Article › peer-review

38 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 language	English (US)
Pages (from-to)	293-304
Number of pages	12
Journal	Journal of Monetary Economics
Volume	17
Issue number	2
DOIs	https://doi.org/10.1016/0304-3932(86)90033-4
State	Published - Mar 1986

ASJC Scopus subject areas

Finance
Economics and Econometrics

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

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.",

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N2 - 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.

AB - 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.

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

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