Customers and Investors: A Framework for Understanding Financial Institutions / Robert C. Merton, Richard T. Thakor.

Format:

Book

Author/Creator:

Merton, Robert C.

Contributor:

National Bureau of Economic Research.

Thakor, Richard T.

Series:

Working Paper Series (National Bureau of Economic Research) no. w21258.

NBER working paper series no. w21258

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Customers and Investors

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2015.

Summary:

Financial institutions have both investors and customers. Investors, such as those who invest in stocks and bonds or private/public-sector guarantors of institutions, expect an appropriate risk-adjusted return in exchange for the financing and risk-bearing that they provide. Customers of a financial intermediary, in contrast, provide financing in exchange for a specific set of services, and do not want the fulfillment of these services to be contingent on the credit risk of the intermediary, even when they are not small, uninformed agents lacking in sophistication. This paper develops a framework that defines the roles of customers and investors in intermediaries, and uses the framework to provide an economic foundation for the aversion to intermediary credit risk on the part of its customers. This customer-investor nexus has implications for a host of issues related to how contracts between financial intermediaries and their customers are structured and how risks are shared between them, as well as the consequences of (unanticipated) deviations from the ex ante efficient contractual arrangement for institutional design, regulatory practices, and financial crises. Moreover, customers and investors are often intertwined in practice, and so this intertwining provides insights into the adoption of "too-big-to-fail" policies and bailouts by regulators in general.

Notes:

Print version record

June 2015.