Modeling the Banking Firm: A Survey

Abstract

THIS PAPER REPORTS on the status of the literature on micro bank modeling and assesses our understanding of the banking firm's optimal behavior. This is no mean task, for much has been written on banking, broadly defined, over the past couple of decades. The review is developed in pieces. Each major subproblem is outlined and the analysis used to deal with the issue explicated. This is not the best way to summarize the development of a field, it should be immediately recognized. One would prefer to have a smooth continuum of development, moving the frontier of knowledge evenly through time and across subareas. Yet, this is rarely the way a field develops. More likely, individual questions attract attention and are the subjects of a substantial number of contributions. After a time, the field moves on to the new area of interest. The banking field is no exception. Before embarking upon the review, however, a couple of lines should be devoted to previous attempts. There have been essentially three. First, Pyle (1972) analyzes the uncertainty portfolio models at a time when little existed in the literature, and hence one finds the review a bit vague and sketchy. Baltensperger's contributions (1978, 1980) are the next serious and rather extensive reviews. The quality of these