Robert Merton is Professor of Finance at the MIT Sloan School of Management. This post is based on an article authored by Professor Merton and Richard Thakor, also of the Finance Group at the MIT Sloan School of Management.
Many financial intermediaries provide “credit-sensitive” financial services—the effective delivery of these services depends on the credit-worthiness of the provider. This potential sensitivity of the perceived value of the intermediary’s services to the intermediary’s credit risk has important ramifications. In the paper, Customers and Investors: A Framework for Understanding Financial Institutions, which was recently made publicly available on SSRN, we examine how this affects the design of contracts between intermediaries and their customers, and how it illuminates ubiquitous features in a wide variety of contracts, institutions, and regulatory practices.