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Moral Hazard under Commercial and Universal Banking

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Author Info
Boyd, John H
Chang, Chun
Smith, Bruce D

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Abstract

Many claims have been made about the potential benefits, and the potential costs, of adopting a system of universal banking in the United States. The authors evaluate these claims using a model where there is a moral hazard problem between banks and 'borrowers,' a moral hazard problem between banks and a deposit insurer, and a costly state verification problem. Under conditions the authors describe, allowing banks to take equity positions in firms strengthens their ability to extract surplus, and exacerbates problems of moral hazard. The incentives of universal banks to take equity positions will often be strongest when these problems are most severe.

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Publisher Info
Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 30 (1998)
Issue (Month): 3 (August)
Pages: 426-68
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Handle: RePEc:mcb:jmoncb:v:30:y:1998:i:3:p:426-68

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Gary Gorton & Frank A. Schmid, 1996. "Universal Banking and the Performance of German Firms," NBER Working Papers 5453, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Berlin, Mitchell & John, Kose & Saunders, Anthony, 1996. "Bank Equity Stakes in Borrowing Firms and Financial Distress," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 9(3), pages 889-919. [Downloadable!] (restricted)
    Other versions:
  3. Boot, Arnoud W A & Thakor, Anjan V, 1997. "Financial System Architecture," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 10(3), pages 693-733.
    Other versions:
  4. Robert Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis. [Downloadable!]
    Other versions:
  5. Saunders, Anthony, 1994. "Banking and commerce: An overview of the public policy issues," Journal of Banking & Finance, Elsevier, vol. 18(2), pages 231-254, January. [Downloadable!] (restricted)
  6. George A. Akerlof & Paul M. Romer, 1993. "Looting: The Economic Underworld of Bankruptcy for Profit," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(1993-2), pages 1-74. [Downloadable!]
  7. Gale, Douglas & Hellwig, Martin, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," Review of Economic Studies, Blackwell Publishing, vol. 52(4), pages 647-63, October. [Downloadable!] (restricted)
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  12. Allen, Franklin & Gale, Douglas, 1995. "A welfare comparison of intermediaries and financial markets in Germany and the US," European Economic Review, Elsevier, vol. 39(2), pages 179-209, February. [Downloadable!] (restricted)
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Larry D. Wall & Alan K. Reichert & Hsin-Yu Liang, 2008. "The final frontier : the integration of banking and commerce. Part 1, the likely outcome of eliminating the barrier," Economic Review, Federal Reserve Bank of Atlanta. [Downloadable!]
  2. Francisco González, 2004. "Do equity investments affect banks' profitability? Evidence from OECD countries," Applied Financial Economics, Taylor and Francis Journals, vol. 14(15), pages 1111-1124, October. [Downloadable!] (restricted)
  3. Laeven, Luc & Levine, Ross, 2005. "Is There a Diversification Discount in Financial Conglomerates?," CEPR Discussion Papers 5121, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  4. John Krainer, 2000. "The separation of banking and commerce," Economic Review, Federal Reserve Bank of San Francisco, pages 15-24. [Downloadable!]
    Other versions:
  5. Edward Simpson Prescott, 2004. "State-contingent bank regulation with unobserved actions and unobserved characteristics," Working Paper 04-02, Federal Reserve Bank of Richmond. [Downloadable!]
    Other versions:
  6. William C. Gruben & Jahyeong Koo & Robert R. Moore, 2003. "Financial liberalization, market discipline and bank risk," Center for Latin America Working Papers 0303, Federal Reserve Bank of Dallas. [Downloadable!]
  7. Delis, Manthos D & Staikouras, Panagiotis, 2009. "On-site audits, sanctions, and bank risk-taking: An empirical overture towards a novel regulatory and supervisory philosophy," MPRA Paper 16836, University Library of Munich, Germany. [Downloadable!]
  8. Barth, James R. & Caprio, Gerard & Levine, Ross, 2000. "Banking systems around the globe : do regulation and ownership affect the performance and stability?," Policy Research Working Paper Series 2325, The World Bank. [Downloadable!]
  9. Fotios Pasiouras, 2008. "International evidence on the impact of regulations and supervision on banks’ technical efficiency: an application of two-stage data envelopment analysis," Review of Quantitative Finance and Accounting, Springer, vol. 30(2), pages 187-223, February. [Downloadable!] (restricted)
  10. Fotios Pasiouras & Chrysovalantis Gaganis & Constantin Zopounidis, 2008. "Regulations, Supervision Approaches and Acquisition Likelihood in the Asian Banking Industry," Asia-Pacific Financial Markets, Springer, vol. 15(2), pages 135-154, June. [Downloadable!] (restricted)
  11. Darren Pain, . "The provisioning experience of the major UK banks: a small panel investigation," Bank of England working papers 177, Bank of England. [Downloadable!]
  12. David A. Marshall & Edward S. Prescott, 2000. "Bank capital regulation with and without state-contingent penalties," Working Paper Series WP-00-10, Federal Reserve Bank of Chicago. [Downloadable!]
    Other versions:
  13. Sanjay Banerji & Andrew Chen & Sumon Mazumdar, 2002. "Universal Banking Under Bilateral Information Asymmetry," Journal of Financial Services Research, Springer, vol. 22(3), pages 169-187, December. [Downloadable!] (restricted)
  14. John H. Boyd & Chun Chang & Bruce D. Smith, 1998. "Deposit insurance: a reconsideration," Working Papers 593, Federal Reserve Bank of Minneapolis. [Downloadable!]
    Other versions:
  15. Luc Laeven & Ross Levine, 2008. "Bank Governance, Regulation, and Risk Taking," NBER Working Papers 14113, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  16. Ugo Albertazzi, 2006. "Incentives in universal banks," Temi di discussione (Economic working papers) 572, Bank of Italy, Economic Research Department. [Downloadable!]
  17. Russell Cooper & Dean Corbae, 2001. "Financial collapse and active monetary policy: a lesson from the Great Depression," Staff Report 289, Federal Reserve Bank of Minneapolis. [Downloadable!]
  18. Daniel Covitz & Erik Heitfield, 1999. "Monitoring, moral hazard, and market power: a model of bank lending," Finance and Economics Discussion Series 1999-37, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  19. Caprio, Gerard & Laeven, Luc & Levine, Ross, 2004. "Governance and bank valuation," Policy Research Working Paper Series 3202, The World Bank. [Downloadable!]
    Other versions:
  20. Lóránth, Gyöngyi & Morrison, Alan, 2008. "Bank Diversification and Incentives," CEPR Discussion Papers 7051, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  21. João A.C. Santos, 1998. "Banking and commerce: how does the United States compare to other countries?," Economic Review, Federal Reserve Bank of Cleveland, issue Q IV, pages 14-26. [Downloadable!]
  22. James B. Thomson, 2001. "Unitary thrifts: a performance analysis," Economic Review, Federal Reserve Bank of Cleveland, issue Q II, pages 2-14. [Downloadable!]
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