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Intermediation and vertical integration

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Author Info

  • Mitchell Berlin
  • Loretta J. Mester

Abstract

Competition in retail and wholesale funding markets affect the incentive for originators (like investment bankers) and fund managers (like mutual funds) to form integrated intermediaries (banks). Independent firms integrate both to produce higher yielding, illiquid assets and to suppress competition in retail markets. In addition to the higher return on illiquid assets, three factors increase the incentive to integrate. First, homogeneous savers lower the costs of producing illiquid assets and increase competition in retail markets. Second, fund managers' market power in wholesale markets increases competition in retail markets. Finally, more certain aggregate savings reduces the costs of producing illiquid assets.

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Bibliographic Info

Article provided by Federal Reserve Bank of Cleveland in its journal Proceedings.

Volume (Year): (1998)
Issue (Month): Aug ()
Pages: 500-523

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Handle: RePEc:fip:fedcpr:y:1998:i:aug:p:500-523

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Keywords: Bank competition ; Bank loans;

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References

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  1. Boot, A.W.A. & Thakor, A.V. & Udell, G.F., 1987. "Credible commitments, contract enforcement problems and banks: Intermediation as credibility assurance," Research Memorandum 282, Tilburg University, Faculty of Economics and Business Administration.
  2. Tim S. Campbell, 1987. "The valuation cost approach to the theory of financial intermediation," Proceedings 169, Federal Reserve Bank of Chicago.
  3. Bhattacharya Sudipto & Thakor Anjan V., 1993. "Contemporary Banking Theory," Journal of Financial Intermediation, Elsevier, vol. 3(1), pages 2-50, October.
  4. Thakor, Anjan V., 2000. "Relationship Banking," Journal of Financial Intermediation, Elsevier, vol. 9(1), pages 3-5, January.
  5. Stahl, Dale O, II, 1988. "Bertrand Competition for Inputs and Walrasian Outcomes," American Economic Review, American Economic Association, vol. 78(1), pages 189-201, March.
  6. Paul Milgrom & Robert J. Weber, 1981. "A Theory of Auctions and Competitive Bidding," Discussion Papers 447R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  7. Matutes, Carmen & Vives, Xavier, 1996. "Competition for Deposits, Fragility, and Insurance," Journal of Financial Intermediation, Elsevier, vol. 5(2), pages 184-216, April.
  8. von Thadden, Ernst-Ludwig, 1995. "Long-Term Contracts, Short-Term Investment and Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 62(4), pages 557-75, October.
  9. Yanelle, Marie-Odile, 1997. "Banking Competition and Market Efficiency," Review of Economic Studies, Wiley Blackwell, vol. 64(2), pages 215-39, April.
  10. Udell, Gregory F., 1989. "Loan quality, commercial loan review and loan officer contracting," Journal of Banking & Finance, Elsevier, vol. 13(3), pages 367-382, July.
  11. Thakor, Anjan V., 1996. "The design of financial systems: An overview," Journal of Banking & Finance, Elsevier, vol. 20(5), pages 917-948, June.
  12. David Besanko & Anjan V. Thakor, 2004. "Relationship Banking, Deposit Insurance and Bank Portfolio Choice," Finance 0411046, EconWPA.
  13. Winton Andrew, 1995. "Delegated Monitoring and Bank Structure in a Finite Economy," Journal of Financial Intermediation, Elsevier, vol. 4(2), pages 158-187, April.
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