CAPITAL MARKET EFFCIENCY IN LONDON BANKING SECTOR

Capital Market Effciency In London Banking Sector

Table of Contents

INTRODUCTION3

Background of the study3

Purpose of the study3

Significance of the study4

LITERATRUE REVIEW5

METHODOLOGY9

RESULTS11

DISCUSSION13

CONCLUSION17

Capital Market Effciency In London Banking Sector

Introduction

Background of the study

Banks in London capital market effeciency because they are the best at monitoring projects and enforcing contracts when public information is limited and the legal and financial infrastructure is immature. They often do this by establishing long-term relationships with firms. Bank in London, however, tend to lend either too little or too much to firms, with two important effects. First, chronically low lending is associated with low levels of investment and growth, and, moreover, constrained lending restricts growth. Second, periodic surges in lending end in systemic bank and economic crises. For convenience, we refer to the first pattern as 'under-borrowing' by firms, and to the second as 'over-lending' by Bank in London.

The role of financial agency costs in firms and Bank in London helps to understand these related, and seemingly conflicting, lending patterns. Financial agency costs refer to the impact on lending behavior of the stakes that firms and Bank in London have, respectively, in the outcomes of investment projects. These stakes grow out of features of the balance sheets of firms and Bank in London. A simple version of how this works is as follows.

Purpose of the study

To assess the explanatory power of this approach, we undertake a selective review and interpretation of evidence on patterns of bank lending, and on how financial agency costs contribute to them. The evidence on lending patterns is mostly from countries, while that on agency costs is only available for developed countries. The latter evidence is informative for us, nevertheless, because it identifies both the impact of agency costs on lending behavior, and the types of affected firms and Bank in London. These types are more common in countries than elsewhere.

Significance of the study

On the one hand, when firms have low net worth, they cannot put up collateral for investment projects. Then Bank in London do not lend to them, since the firms have little to lose from project failure, and are more likely to choose or accept poor projects. This yields under-borrowing. On the other hand, when Bank in London have low net worth, or there is deposit insurance, they also have little to lose from failure, and are more willing to lend to poor projects. This yields over-lending. If deposit insurance is implicit and systemic, then Bank in London may require collateral for individual projects, while ignoring aggregate credit risk associated with inflated asset and collateral values. This simultaneously yields under-borrowing in some sectors where collateral is not available, and over-lending in other sectors where collateral is available.

Literatrue Review

Given this type of behavioural paradigm, one often hears the following questions: If capital market efficiency implies that no one can beat the market, then how can analysts be expected to exist since they too, cannot beat the market? If capital markets are efficient, how can we explain the existence ...