Name:

MAN 629 - Seminar in Financial Intermediation

Final Exam - Spring 2014
Q1. Consider a three period Diamond Dybvig economy (t=0,1,2). At t=0,
all consumers are identical and have a saving of 1. At date 1, consumers
learn their preferences. A fraction has utility u(c1 ) and a fraction (1-)
has utility u(c2 ).
At date 0, the consumers put their savings in a bank. They later cannot
withdraw and invest in financial markets, so the Jacklin critique does not
apply. That is, incentive compatibility issues are ignored in this exercise1
The bank invests the per-depositor savings into short- and long-term projects:
i1 + i2 = 1. The long-term technology yields (per unit of investment) R > 1
at date 2, but only l < 1 if liquidated at date 1. The short-term technology
yields 1 (so r1 = r2 = 1).
a What is Jacklin critique?2 Explain briefly.
b Show that the optimal allocation (c1 , c2 ) satisfies
u0 (c1 ) = Ru0 (c2 ).
Suppose that u(c) = c1 /1 with > 1 How do i1 and i2 vary with ?
c Suppose now that there is macroeconomic uncertainty, in that is unknown: = L with probability and = H with probability 1 ,
where 0 < L < H < 1. Set up the optimal program (let y and z denote the fraction of short-term investment that is not rolled over, and the
1

A bank-run is ignored in this exercise. In another words, a patient depositor cannot

disguise as an impatient one.

2
See Jacklin (1987)

fraction of long-term investment that is liquidated, respectively, in state of

nature {L, H}). What does the solution look like for l = 0 and l close
to 1? (Hint: characterize the solution for a general l)

Q2. Referring to the main papers in the banking literature, answer one big
question of (a) why do banks fund illiquid assets with liquid liabilities? and
several related small questions: (i)How should banks be finance? (ii) Why
do banks use non-traded liabilities than other firms of comparable size? (iii)
What roles does the deposit contract play in bank runs and banking panics? (iv) What is the role of government initiatives in halting bank runs?
(v) What is the relationship between runs and panics? (vi) Can liquidity
demand be satisfied without bank runs?
Q3. You want to analyze how the relationship banking affects the performance of Turkish firms.
a. Specify three hypotheses that you want to test regarding to this relationship. Please support your hypotheses with the studies that we discussed
in class and others in the literature.
b. Design a reseach strategy for your analysis. How will you measure
firm performance and their banking relationship? What will be your control
variables in your analysis? Explain your sample and your methodology.
Q4. Interpret the results reported in Table IV (page 2822) by Qian and
Strahan (2007).