(importance/ motivations for the studying this topic)
country’s economy relies heavily in the banking sector to keep it afloat and as
stable as possible. For a long time now, banks and the whole banking and
financial systems have been of the outmost importance for every government. In
order to ensure that the future of the economy of a nation is secure and
long-lived, a government must ensure the wellbeing of the banking sector,
taking into consideration the fact that banks are the main providers of funds.
where do banks get the necessary funding to cover all the demand for funds that
the market has? The two main ways that banks raise capital are through equity
markets and debt markets. A crucial variable for a bank when raising funds is
also the need for information. It is through this information that allows
banking institutions to best choose and invest their depositors’ funds. Not
only that, but also, having valuable insight of the market and the economy,
allows banks to best decide who to lend to in order to guarantee the soundness
of the loans it is giving to borrowers.
into consideration the importance and role that information plays in the
decision making process of the banking sector, it would be wise to show
tremendous care as to how to analyze and administer this information. Seeing as
we live in an imperfect economy and one where many factors contribute to its
melioration or deterioration, asymmetric information is a usual occurrence in
the banking system that can bring important positive or negative impacts on the
economy. That it why, it is best to carefully study information asymmetry in
the banking sectors and the problems that arise from it, so as to get a better
understanding and to ensure a more stable and growing economy in the future.
2. What is Asymmetric
information is a term used to refer to situations, where one party in an
economic transaction has more knowledge than the other party. This is usually
manifested when the seller of a good or service has a wider knowledge than the
buyer, although sometimes the opposite can also happen (Investopedia).
to the usage of this term in the banking sector, it is a widely known
phenomenon. Almost all economic transactions do contain some information
asymmetry. And while this is a preferable alternative in a market economy, in
the banking sector it can lead to a variety of problems and repercussions. In
commercial and investment banks not having the proper information or not fully
knowing who you are lending to or the consequences derived from it, can bring
serious damage to the banking institution itself and to the economy overall.
In the figure below, it
is simply shown the relationship between information asymmetry and the parties
to whom it is connected.