ABSTRACT
This chapter aims to offer an overview on the concept of bank rent. It elaborates on the unique role of bank rent as incentives for bank managers to become prudent monitors and managers. The chapter shows that the logic of rent as incentive mechanism can be derived from the very notion of 'residual income' or the Marxian concept of 'surplus', which is often prescribed to overcome the monitoring problem involved with high transaction cost. It argues that the bank rent model advocates for regulated deposit and/or lending rates such that the bank rent opportunity as incentive is maintained for the banks to become prudent monitors, while the lending rate remains still attractive for creditable borrowers. The chapter considers the possibility that the 'rent effect' on saving is large – that is, there is increased savings due to greater deposit security and/or increased investments in improving the deposit infrastructure, which ultimately facilitates greater access to the formal financial sector.
