Financial Intermediation


This course aims at explaining financial intermediation, in particular the part of financial intermediation done via banks. The course also aims at explaining some of the most important developments in financial intermediation, including loan securitization, the CDS market and the growth of shadow banking.

General characterization





Responsible teacher

João Cabral dos Santos


Weekly - Available soon

Total - Available soon

Teaching language




Part I: Why do we need banks?

  • A) Banking theories
  • Diamond, D. 1996. Financial intermediation as delegated monitoring: A simple example, Federal Reserve Bank of Richmond Quarterly Review 82(3), 51-66.

    Diamond, D. and P. Dybvig. 1983. Bank runs, deposit insurance and liquidity, Journal of Political Economy 91, 401-419.

    James, C. 1987. Some Evidence on the Uniqueness of Bank Loans, Journal of Financial Economics 19, 217-235.

  • B) The importance of the interbank market
  • Bhattacharya, S. and D. Gale. 1987. Preference Shocks, Liquidity, and Central Bank Policy. Pp. 69-88 in New Approaches to Monetary Economics, eds. W. A. Barnnett and Kenneth J. Singleton, Cambridge: Cambridge University Press.
    Part II: Bank regulation

  • A) Why do banks need to be regulated?
  • Allen, F. and D. Gale. 2000. Financial Contagion. Journal of Political Economy 108(1), 1-33.

  • B) Deposit insurance
  • Diamond, D.W. and P.H. Dybvig. 1986. Banking Theory, Deposit Insurance, and Bank Regulation, Journal of Business 59, 53-68.

    Chan, Y.S., S.I, Greenbaum, and A.V. Thakor. 1992. Is Fairly Priced Deposit Insurance Possible? Journal of Finance 47, 227-245.

  • C) Capital regulation
  • Koehn, M. and A.M. Santomero. 1980. Regulation of Bank Capital and Portfolio Risk, Journal of Finance 35, 1235-1244.

    Santos, J.A.C. 1999. Bank Capital and Equity Investment Regulations, Journal of Banking and Finance 23(7), 1095-1120.

  • D) Liquidity regulation
  • Santos, J.A.C. and J. Suarez. 2013. The Role of Liquidity Standards in Optimal Lending of Last Resort Policies, Mimeo Federal Reserve Bank of New York

  • E) Lender of last resort
  • Flannery, M.J. 1996. Financial Crises, Payment System Problems, and Discount Window Lending, Journal of Money, Credit and Banking 28(4), 804-824.
    Part III: Bank lending relationships

    Rajan, R.G.. 1992. Insiders and Outsiders: The Choice between Informed and Arm´s Length Debt, Journal of Finance 47(4), 1367-1400.

    Santos, J.A.C. and A. Winton. 2008. Bank Loans, Bonds, and Information Monopolies across the Business Cycle, Journal of Finance 63(3), 1315-1359.
    Part IV: Borrowing from banks or issuing bonds?

    Denis, D.J., and V.T. Mihov. 2003. The choice among bank debt, non-bank private debt and public debt: Evidence from new corporate borrowings, Journal of Financial Economics 70(1), 3-28.

    Diamond, D.W. 1991. Monitoring and Reputation: The Choice between Bank Loans and Directly Placed Debt, Journal of Political Economy 99(4), 689-721.

    Holmstrom, B. and J. Tirole. 1997. Financial Intermediation, Loanable Funds, and the Real Sector, Quarterly Journal of Economics 112, 663-691.

    Santos, J.A.C. 2006. Why Firm Access to the Bond Market varies over the Business Cycle: A Theory and some Evidence, Journal of Banking and Finance 30, 2715-2736.
    Part V: Other topics (class 12)

  • A) Secondary loan market
  • Pennacchi, G.G., 1988. Loan sales and the cost of bank capital, Journal of Finance 43, 375-396.

  • B) Syndicated loan market
  • Sufi, A. 2006. Information asymmetry and financing arrangements: Evidence from syndicated loans, Journal of Finance 62(2), 629-668.

  • C) Loan securitization
  • Bord, V. and J.A.C. Santos. 2015. Does the securitization of corporate loans lead to riskier lending? Journal of Money, Credit and Banking, 47(2-3), 415-444.

  • D) Credit default swaps
  • Duffee, G.R., and C. Zhou. 2001. Credit derivatives in banking: Useful tools for managing risk? Journal of Monetary Economics 48, 25-54.

  • E) Market-based pricing in corporate lending
  • Ivanov, I, J.A.C. Santos, and T. Vo. 2016. The transformation of banking: Tying loan interest rates to borrowers CDS spreads, Journal of Corporate Finance 38, 150-165.


    All of the articles in the bibliography will be made available to students. There will also be handouts to complement the materials discussed in classes, which will be made available to students throughout the semester.

    Teaching method

    Classes plus reading materials for students to accompany and complement the topics discussed in classes.

    Evaluation method

    The Final Exam is mandatory and must cover the entire span of the course. The weight of the final exam should not be less than 30% nor exceed 70%. The remainder of the evaluation can consist of class participation, midterm exams, in class tests, etc. Overall, written in class assessment (final exam, midterm) must have a weight of at least 50%.

    Two in class-quizzes, each worth 15% of the final grade and a final exam worth 70% of the final grade. Approval in the course requires a minimum of 10 in the final exam.

    Subject matter

    Financial intermediation covers five main topics:

    • (I) Why do we need banks ?

    • (II) Why do we need to regulate banks ?

    This part of the course will also discuss the most important bank regulations.

    • (III) The advantages and disadvantages for firms to establishing borrowing relationships with a given bank.

    • (IV) The potential benefits for firms from combining bank borrowing with bond financing.

    • (V) Some of the most important recent developments in financial intermediation, including the growth of the secondary loan market, loan securitization and the CDS market.