A Theory of Production for the Financial Firm by Diana Hancock

By Diana Hancock

Furthermore, if the results of laws on person charges are excluded, it's very unlikely to investigate financial coverage results. bankruptcy 2 examines the vital parts of law that have an effect on consumer charges. for instance, reserve necessities, as administered via the Federal Reserve, act as a tax on monetary agencies so coated. Required reserves earn no go back to the monetary enterprise and there's foregone profit. Deposit assurance raises the person price of servicing deposits to the banks. rate of interest laws position limits on rates of interest on time de­ posits, or restrict funds on call for deposits in the course of a part of the interval studied. Underlying these kind of are the open industry operations of the Federal Reserve, and their results on rates of interest and the amounts of monetary items. bankruptcy 2 unearths that prior paintings at the estimation of financial institution tech­ nologies is incomplete, and that the laws require modelling as part of the revenue maximizing constitution. 1.3 consumer fee Derivation bankruptcy three discusses the development of person bills. those are derived for the prone from all resources or liabilities on a financial institution stability sheet or showing at the source of revenue assertion. The consumer price formula allows items to be labeled as outputs and inputs. people with a favorable consumer price, the place expenses in keeping with unit exceed sales consistent with unit, are inputs. The unit for monetary items resembling loans or deposits is one buck in keeping with interval. items with a detrimental person fee, with bills falling less than profit consistent with unit, are outputs.

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Santomero [1983] has pointed out that the optimal insurance premium structure will also be capital structure dependent. 26The maximum level of deposits covered by insurance is another policy variable. Including this information in user costs requires a distribution of deposits into covered and uncovered portions. Typically data are not available that make this distinction. Over the last several decades, however, failed institutions have been dealt with in a manner that has protected all depositors, rather than just the insured category.

This result is due to Rotelling [1932, p . 594]. Profit maximizing labor and other input demands, asset and liability holding decisions, and output supplies are simultaneously determined in our model of the financial firm given exogenous prices and user costs. 12 Actually, convexity of the production possibility set may be omitted and the profit function, 7r, will satisfy the above five conditions. See Diewert [1973, p. 289]. Note, however, if we assume the production possibility set is closed, non-empty, convex and has the properties of (i) free disposal and (ii) contains the zero vector, then 7r completely characterizes S.

And, as the discounting rate increases, liability items such as demand and time deposits are more likely to be classified as outputs. Traditionally, there have been two justifications for considering deposit services as outputs of the financial firm. First, since the services which are performed for deposit customers benefit the latter, it has been argued (Benston [1965], Bell and Murphy [1968], Longbrake [1974]) that possibly these services constitute outputs. 9 This does not imply that deposit services are necessarily outputs.

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