Do public banks have a competitive advantage?
AbstractPublic banks are often blamed to possess an unfair competitive advantage in the form of lower funding costs due to a state guarantee on their deposits. However, public and private banks tend to differ not only in their funding costs, but also in the way they deal with borrowers in financial distress. The model presented in this paper shows that if banks differ in these two characteristics, a separation of borrowers may result, with public banks lending to risky firms and private banks lending to safe firms. This separation can explain differences in the lending behavior and performance of public and private banks as observed in the market. Interestingly, the separation may persist even when funding costs are equal, implying that an abolition of state guarantees will not necessarily lead to identical performance of the two types of banks.
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Bibliographic InfoArticle provided by Taylor & Francis Journals in its journal The European Journal of Finance.
Volume (Year): 16 (2010)
Issue (Month): 1 ()
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Other versions of this item:
- Astrid Matthey, 2008. "Do Public Banks have a Competitive Advantage?," SFB 649 Discussion Papers SFB649DP2008-010, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
- Astrid Matthey, 2007. "Do Public Banks have a Competitive Advantage?," Jena Economic Research Papers 2007-100, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
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