This paper compares the optimal lending decisions of financial intermediaries that differ in their risk exposure. All intermediaries are assumed to face a loan demand described by a random applicant arrival process with each applicant offering a unique risk‐adjusted rate of return; loan demand is therefore uncertain in both quantity and quality. The intermediaries differ in terms of their risk exposure because of disparate funding practices. Intermediaries functioning as brokers minimize their exposure by borrowing funds only as demand is realized, whereas those behaving as asset‐transformers borrow in advance of realizing loan demand, thereby maintaining a loanable funds inventory and sustaining the related exposure. The optimal sequential lending policy is shown to involve setting a credit standard that becomes stricter with the length of the intermediary's planning horizon and the volume of loans outstanding. Most importantly, it is shown that brokers adopt stricter credit standards than asset‐transformers and therby reduce their volume of lending.

The financial intermediary's choice of operating as a broker with minimal risk exposure or as an asset‐transformer with interest rate risk is modeled as a funds inventory decision made prior to the resolution of uncertainty regarding the borrowing or lending interest rates. It is shown that an increase in the interest rate uncertainty leads the intermediary to reduce its exposure, thereby offering decreased asset‐transformation and more brokerage services. However, a stochastic increase in the interest rates leads to greater asset‐transformation and less brokerage services.

This paper examines the effects of loan commitments on bank lending behavior in both deposit‐funding and liability management environments. Assuming that the bank lends exclusively under commitments and that the number of commitments exercised is uncertain, the bank must choose its supply of commitments. Given this choice, the bank becomes a passive lender to commitment holders. Our focus on forward credit markets sheds new light on the private bankers' assertion that they do not directly determine their level of lending, but merely “accommodate” the credit needs of their customers. Similarly, the central banker's claimed inability to control monetary aggregates in the short‐run becomes understandable in a new context. It is shown that the advent of liability management will reduce the volume of loan commitments and the expected size of the bank and of the banking system. It is also shown that increased uncertainty regarding borrower takedown behavior diminishes the volume of commitments, expected bank and banking system size.

We present a general model for the optimal consumption of a nonrenewable resource under two kinds of uncertainties. One source of uncertainty is in the resource discovery process and the other is in the economic environment that affects resource supply and demand conditions, such as exhaustion and development of a substitute. The problem is formulated as one of optimally controlling a storage process with Markov additive discoveries. The optimal value of the resource stock is characterized as the solution of a functional equation and the existence of an optimal consumption policy is established. It is shown that, in a given environment, the optimal consumption rate is increasing and the resource price is decreasing in the level of proven reserves. A counterexample is provided to show that better environments may in fact mean higher prices and lower consumption rates. Finally, a variety of examples is given to illustrate the scope and applicability of the general model.

[We consider the intertemporal problem of optimally consuming a natural resource and exploring for new sources of supply of that resource. Resource consumption yields social utility while the exploration effort controls the uncertainty in the timings of discoveries as well as their magnitudes. The objective is to choose an optimal consumption and exploration policy so as to maximize the expected discounted utility of consumption net of the exploration cost over an infinite planning horizon. We present a controlled storage process model of the problem and under reasonable conditions we characterize the existence and the properties of optimal policies and prices.]

Sudhakar D. Deshmukh, Stuart I. Greenbaum, Anjan V. Thakor, Capital Accumulation and Deposit Pricing in Mutual Financial Institutions, The Journal of Financial and Quantitative Analysis, Vol. 17, No. 5 (Dec., 1982), pp. 705-725