Analyzing the Economics of Citigroup's Retail Banking Group, Citibank

Citibank is the retail banking arm of Citigroup (Citigroup). As such, it functions much like any other bank – an intermediary between borrower-spenders and lender-savers. Another way to look at the relationship between these borrower-spenders and lender-savers is to use an overlapping generations model. Once we do this, we can explore how the individual bank fits into this equation, and apply it to the real-world.

The overlapping generation model, in its simplest form, has one good, a consumption good. This good is endowment, and is roughly analogous to the sum total of goods consumed by a person in their working years. Each person lives for two periods, receives endowment in the first period, and nothing in the second period. Endowment, however, is non-durable, so the old will have no consumption, as there is no incentive for the young to trade endowment, as the old have nothing to trade.

This model is not yet complicated enough for a bank to exist yet, though. The next step involves money. Money is something that represents value. There are two types of issued currency – commodity currency, and fiat currency. Commodity currency has material value by itself. Fiat currency, however, has no intrinsic value. Once money is introduced into the overlapping generation money, young and old are both able to consume, as the old can trade money for endowment, and the young can trade endowment for money, thus allowing them to trade it back for endowment when old, and consume when old. We still do not need banks, though, as the economy trades freely, and everybody earns the same rate on money.

In order for this economy to demand a financial intermediary, there must be some other good. This good is capital. Like money, it can be traded for endowment to assure future consumption. In order for capital to be different from money, we will need to assume a three period lifespan. While money earns the same rate, and can be converted to endowment in the next...