b) Discuss the role of off-balance sheet items in banking. Particularly, why did off-balance sheet activities become popular in the banking business? Stress the characteristics, benefits and risks of at least one off-balance sheet activity discussed in class. Total for b): 10 marks

c) We have shown that banks are redundant in a simple general equilibrium economy with no frictions. Discuss the theories proposed to move away from the aforementioned result and that justify the existence of banks. Moreover, discuss in more detail at least one theory that justifies the presence of banks because of their role in the economy, i.e. banks as a pool of liquidity.