Graduate School of Business and Public Administration, Cornell University. I would like to thank Michael Brennan, David Easley, George S. Oldfield, and Anthony M. Santomero for helpful comments.
A Dynamic Theory of the Banking Firm
Article first published online: 30 APR 2012
1983 The American Finance Association
The Journal of Finance
Volume 38, Issue 1, pages 127–140, March 1983
How to Cite
O'HARA, M. (1983), A Dynamic Theory of the Banking Firm. The Journal of Finance, 38: 127–140. doi: 10.1111/j.1540-6261.1983.tb03630.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
Dynamic analysis has greatly increased our understanding of the microfoundations of the general firm. Unfortunately, however, little attention has been focussed on the dynamic nature of the banking firm. Instead, most theoretical work has derived the optimal behavior for the bank in a single period context. This approach, while yielding insight into the function of the bank as a broker between borrowers and lenders, has proven incapable of capturing many essential elements of the banking firm. The role of capital, for example, is understated if the risk of bankruptcy is not considered. Perhaps more importantly, the role of banks in transforming risks in an uncertain environment cannot be captured if the problem of handling these risks over time is not considered. This paper incorporates these dual roles of brokerage and risk transformation in a cohesive model of the banking firm.