TRANSACTIONS COST ECONOMICS

Key Characteristics Of Transactions Cost Economics (TCE) - Analysing the vertical boundaries of Barclays Bank



Key Characteristics Of Transactions Cost Economics (TCE) - Analysing the vertical boundaries of Barclays Bank

Introduction

The paper explores the concept of key characteristics of Transactions Cost Economics (TCE) in banking sector. Additionally this paper identifies the vertical boundaries of a chosen firm i.e. Barclays Bank. Specifically this paper discusses the boundaries of Barclays Bank by determining what to make and what to buy regarding the credit risk transfer decisions.

The advent of a credit risk market has profoundly altered the role of banking firms into one of asset originator and asset distributor rather than the asset holder. Banks have traditionally originated and held credit risk. The vertical disintegration of the banking industry and the creation of a credit risk transfer market enable the shifting from a firm-based governance to a market-based governance (Madhok, 2009: 577-590). Furthermore, this paper proposes that modularity and standardization drives the creation and growth of credit risk transfer market. The production and distribution of banking products and services has traditionally been vertically integrated. Nowadays, financial innovation and new technologies are reshaping the process of production and distribution of all financial services. Information technology enables better information handling capabilities across firm boundaries (Shelanski, 2010: 335-361). Banks tend to seek new opportunities to diversify or to refocus their supply of financial services according to their relative competitiveness. Value chains become more disintegrated and intermediate markets appear. Until the early 1970s the traditional value chain of the banking lending was integrated. Banks processed applications and serviced loans until they expired. Transaction cost economics, the dominant paradigm for understanding make or buy decisions, represents the starting point of my research in order to understand the effects of modularity and standardization on the creation of intermediate markets (Culp, 2010: 141-145).

The New Financial Tools of Credit Risk Transfer Market: Credit Derivatives and Securitization

Credit risk has historically been regarded as illiquid, while credit risk management has been regarded as static in nature. Instead, the use of credit derivatives and securitization increases the liquidity of credit risk market and facilitates the adoption of new dynamical approaches to risk management compatible with the dynamic nature of credit risk. Credit derivatives are financial instruments that structure the credit risk of a portfolio of credit assets in a format that allows credit risk to be traded in capital markets. Credit derivatives allow the unbundling of credit risk from other transactions (Mishkin, 2009: 233-238). Credit risk can be separately traded in financial markets. This deconstruction of financial assets (loans) into the constituent element (default risk) facilitates the separate trading of credit risk as an individual risk aspect. This decomposition allows banks and other financial institutions to regard credit risk as a separate and distinct tradeable asset class. Credit derivatives are a mechanism for disaggregating credit risk and allowing trading in this risk attribute (Rindfleisch, 2010: 30-54).

Barclays Bank may originate credit risk either in on-balance sheet form or in off balance sheet ...