讲解 IB3J80 Banks and Financial Systems Summer Exam Paper 2020-21辅导 Processing

Question 1: Financial Systems [40 marks in total]

a.   When financial markets are frictionless, firms with profitable projects can always raise external financing. Yet, in reality, credit rationing often happens. Please give the example of two types of market imperfections that make it difficult to raise external funding. [10 marks]

b.   Another function of the financial system is to mitigate and effectively re-allocate risks. Please give an example of how the function can be achieved in financial markets and an example of how the function is fulfilled by financial institutions. [10 marks]

Active membership of private sector occupational pension scheme by benefit structure, 2008 to 2018

Source: Office for National Statistics - Occupational Pension Schemes Survey

c.   As illustrated by the graph above, the defined-contribution pension schemes have become more common in the U.K. as compared to the defined-benefit schemes in recent years. How would you evaluate the trend in terms of effectiveness in risk-sharing and financial stability? [10 marks]

Financial systems in different countries show significant heterogeneity regarding the relative importance of financial markets and financial intermediations.

Source: The World Bank

d.   Please discuss one advantage and one disadvantage of the intermediation-oriented systems. [10 marks]

Question 2: Financing and credit crunches [40 marks in total]

An entrepreneur has 1 unit of personal wealth and chooses an investment project between Project A and B. When Project A is successful, each unit of investment in the project generates a gross return of RA = 1.2. By comparison, when Project B succeeds, each unit of investment in the project generates a gross return of RB = 1.15. A project generates zero income when it fails. If the entrepreneur works hard, his project will succeed with certainty (i.e., pH = 1).  If the entrepreneur shirks, he will reduce the probability of success to pL = 0.8 but will obtain a private benefit that is proportional to the size of investment. The entrepreneur’s effort affects the probability of success of the two projects in the same way. The amount of the private benefit, however, differs across the two projects. Shirking on Project A allows the entrepreneur to gain a private benefit BA = 0.08 for one unit of investment in the project, whereas shirking on Project B only allows the entrepreneur to gain a private benefit BB = 0.05 per unit of investment in the project.

a.   If the entrepreneur only invests with his 1 unit of personal wealth, which one of the two projects will he prefer?         [10 marks]

Now consider a scenario where the entrepreneur can raise external financing to increase the size of investment to X >1(in which case the entrepreneur will need to raise X - 1from external financiers). We assume that both projects feature constant returns to scale. That is, when X units are invested in Project A, the project will generate a revenue of X ×RA if it succeeds. (Similarly, if X units are invested in Project B, the project will generate a revenue of X ×RB .) As mentioned, the entrepreneur’s private benefit is also proportional to the size of the investment. That is, if X units are invested in Project A, the total gain from shirking equals X ×BA . (Similarly, if X units are invested in Project B, the total gain from shirking equals X ×BB .) Both the entrepreneur and external financiers are risk neutral.

b.   Which one of the two projects has a higher pledgeable income per unit of investment? [10 marks]

c.   What is the maximum size of investment that the entrepreneur can sustain for Project A and B, respectively?          [10 marks]

d.   Which one of the two projects will the entrepreneur prefer when he can raise external financing?           [10 marks]

Question 3: FinTech [40 marks in total]

a.   Please give an example of a FinTech firm and the main service that it provides. [10 marks]

b.   Please compare the service that you described above with that provided by traditional financial institutions and discuss two main differences that you see from the comparison. [10 marks]

c.    Should financial regulators be concerned with the rapid development ofFinTech firms and the competition pressure that they place on the traditional financial sector? Please give two reasons to support your answer.                                            [10 marks]

FinTech firms have achieved high penetration in credit markets such as mortgage markets.

d.   Please discuss one potential benefit and one potential risk ofFinTech firms’ participation in the mortgage markets.          [10 marks]

Question 4: Securitization and Market-based Financing [40 marks in total]

Consider the following setup of the Gorton-Pennacchi (1990) model, where three groups of investors inhabit a three-date economy (t = 0, 1, 2). At t = 0, a continuum of investors of mass 1 enter the market, each of them holding one unit of endowment. Half of the population are liquidity traders, with autility function U = C1. And the other half of the population are informed traders, with a utility function U = C1  + C2. Both liquidity traders and informed traders are risk-neutral. They invest their unit endowment at t = 0 into indivisible long-term projects that generate uncertain returns R on the terminal date of t = 2. A long-term project’s return can be either high (RH   = 1.2) or low (RL   = 0.9), with probabilities 2/3 and 1/3, respectively. The returns of long-term projects are independently and identically distributed across investors. At t = 1, the liquidity traders and informed traders learn the would-be returns of their investment privately. Also, a group of new investors enter the market on this interim date. These interim-date investors have a utility function U = C2. In the absence of storage technologies, they seek saving instruments to carry their wealth from t = 1 to t = 2. The interim-date investors are uninformed: they do not know the quality of individual projects and only bid competitively. Furthermore, it is assumed that each of them has limited wealth and cannot achieve perfect diversification by holding infinitely many long-term projects.

a.   If the interim-date asset buyers are risk-neutral, how much would they be willing to pay for one unit of the long-term investment?     [10 marks]

b.   Now, consider the case where the interim-date asset buyers are risk-averse and demand a discount of 0.05 when buying assets with unknown qualities. Please show that asymmetric information on asset qualities leads to welfare losses.      [10 marks]

c.   Please propose a security design that can restore the first-best allocation (i.e., the allocation that can be achieved if there is no information asymmetry).                    [10 marks]

d.   While securitization can have many benefits, it also had a prominent role in the U.S. subprime crisis. The development of shadow banking in the run-up of the crisis provides us many lessons. Please discuss one of them and comment on any policy reform. that is introduced to address the problem.                                       [10 marks]