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Do public banks have a competitive advantage?

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  • Astrid Matthey

Abstract

Public 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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File URL: http://www.tandfonline.com/doi/abs/10.1080/13518470902853475
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal The European Journal of Finance.

Volume (Year): 16 (2010)
Issue (Month): 1 ()
Pages: 45-55

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Handle: RePEc:taf:eurjfi:v:16:y:2010:i:1:p:45-55

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Related research

Keywords: public banks; state guarantee; self-selection;

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References

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  1. Chemmanur, Thomas J & Fulghieri, Paolo, 1994. "Reputation, Renegotiation, and the Choice between Bank Loans and Publicly Traded Debt," Review of Financial Studies, Society for Financial Studies, vol. 7(3), pages 475-506.
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Cited by:
  1. Höwer, Daniel, 2013. "Corporate main bank decision," ZEW Discussion Papers 13-018, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.

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