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The banking firm: theoretical principles and their violations in the USA

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  • Demetri Kantarelis

Abstract

The purpose of this paper is to describe a simplified model of the banking firm and contrast its theoretical principles against data from the recent financial crisis especially as it relates to sub-prime lending in the USA. The model presented does not include all aspects of lending; it primarily focuses on 'originate-to-distribute' mortgage loans to the exclusion of other. The proposed theory of the banking firm and the comparison of its principles against performance data may serve as a guide to reforming lending institutions in the wake of the recent financial crisis. The paper contributes, primarily, to pedagogy: it proposes a simplified theory of the banking firm which captures the bare essentials of banking. Additionally, it points-out that the 'originate-to-distribute' banking malaise was one of the drivers of the recent financial crisis but not its root cause.

Suggested Citation

  • Demetri Kantarelis, 2010. "The banking firm: theoretical principles and their violations in the USA," International Journal of Business Continuity and Risk Management, Inderscience Enterprises Ltd, vol. 1(3), pages 222-232.
    • Handle: RePEc:ids:ijbcrm:v:1:y:2010:i:3:p:222-232
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