Microeconomics of Banking

Microeconomics of Banking

By Xavier Freixas and Jean-Charles Rochet





Twenty years ago, most banking courses focused on either management or monetary aspects of banking, with no connecting. Since then, a microeconomic theory of banking has developed, mainly through a switch of emphasis from the modeling of risk to the modeling of imperfect information. This asymmetric information model is based on the assumption that different economic agents possess different pieces of information on relevant economic variables, and that they will use the information for their own profit. The model has been extremely useful in explaining the role of banks in the economy. It has also been useful in pointing out structural weaknesses of the banking sector that may justify government intervention—for example, exposure to runs and panics, the persistence of rationing in the credit market, and solvency problems. Microeconomics of Banking provides a guide to the new theory. Topics include why financial intermediaries exist, the industrial organization approach to banking, optimal contracting between lenders and borrowers, the equilibrium of the credit market, macroeconomic consequences of financial imperfections, individual bank runs and systemic risk, risk management inside the banking firm, and bank regulation. Each chapter ends with a detailed problem set and solutions.


Out of Print ISBN: 9780262061933 334 pp. | 7.2 in x 10 in


  • The book is a major contribution to the literature on the theory of banking and intermediation. It brings together and synthesizes a broad range of material in an accessible way. I recommend it to all serious scholars and students of the subject. The authors are to be congratulated on a superb achievement."

    Franklin Allen

    Nippon Life Professor of Finance and Economics, Wharton School, University of Pennsylavania

  • This book will be a godsend both for students and teachers of graduate moeny and banking courses, (at the Msc and doctoral levels), like myself. Several decades ago banking was presented in an institutional and descriptive framework, with a few linkages to pure theory. In recent decades analysis of the roles and functions of banking, (including such topics as credit rationing, systemic bank panics and regulation), have been re-integrated into mainstream economic theory. This re-integration has been mainly achieved through myriad articles in specialized journals. Freixas and Rochet have not extracted the essence of the key articles, and have put together a clear, excellently organized and presented graduate text-book (which was much needed; there is no good alternative available).

    C.A.E. Goodhart

    CBE, Deputy Director, Norman Sosnow Professor of Banking & Finance, Financial Markets Group, London School of Economics

  • This book is unique. It is the first advanced exposition of banking theory as it has been developped in the 1980s and 90s, it puts an important part of corporate finance on solid microeconomic grounds, and it covers the institutional framework from risk management to regulation. It is an excellent book for PhD courses in banking, financial institutions, applied contract theory, and corporate finance. I look forward to using it in all of those areas.

    Ernst-Ludwig von Thadden

    Professor of Economics, Universite de Lausanne

  • A comprehensive handbook of modern banking theory, indispensable for any scholar of banking and intermediation. I particularly appreciated the lucid presentation of complex models, that renders the book an essential teaching aid.

    Oved Yosha

    Berglas School of Economics, Tel Aviv University

  • At last the profession has an advanced book on the theory of banking. Freixas and Rochet make a real contribution to the profession by integrating a disparate but growing literature on intermediation. They show the role that these institutions play in the economy and the complex nature of optional decision making in an imperfect captial market. The book should be required reading for serious students in the area.

    Anthony M. Santomero, Richard K. Mellon

    Professor of Finance, The Wharton School, University of Pennsylvania

  • This book provides the first comprehensive treatment of the Microeconomics of Banking. It gives an impressive synthesis of an enormous body of research developed over the last twenty years. It is clearly written and a pleasure to read. What I found particularly useful is the great effort Xavier Freixas and Jean-charles Rochet have taken to systematically integrate the theory of Financial Intermediation into classical Microeconomics and Finance Theory. This book is likely to become essential reading for all graduate students in Economics, Business and Finance.

    Patrick Bolton

    Professor of Economics, ECARE, Free University of Brussels; and CentER, Tilburg University

  • The authors have provided an extremely thorough and up-to-date survey of microeconomic theories of financial intermediation. This work manages to be both rigorous and pleasant to read. Such a book was long overdue and should be required reading for anybody interested in the economics of banking and finance.

    Mathias Dewatripont

    Professor of Economics, ECARE, Université Libre deBruxelles