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Banking and commerce: a liquidity approach

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Author Info

  • João A. C. Santos

    (Federal Reserve Bank of New York)

  • Joseph G. Haubrich

    (Federal Reserve Bank of Cleveland - Research Department)

Abstract

This paper looks at the advantages and disadvantages of mixing banking and commerce, using the "liquidity" approach to financial intermediation. Bringing a non-financial firm into a banking conglomerate may be advantageous because it may make it easier for the bank to dispose of assets seized in a loan default. The internal market formed inside the banking and commerce conglomerate increases the liquidity of such assets and improves the bank's ability to perform financial intermediation. More generally, owning a non-financial firm may act either as a substitute or a complement to commercial lending. In some cases, a bank will voluntarily refrain from making loans, choosing to become a non-bank bank in an unregulated environment.

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Bibliographic Info

Paper provided by Bank for International Settlements in its series BIS Working Papers with number 78.

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Length: 34 pages
Date of creation: Oct 1999
Date of revision:
Handle: RePEc:bis:biswps:78

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References

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  1. John H. Boyd & Chun Chang & Bruce D. Smith, 1998. "Moral hazard under commercial and universal banking," Proceedings, Federal Reserve Bank of Cleveland, issue Aug, pages 426-471.
  2. Raghuram Rajan & Henry Servaes & Luigi Zingales, . "The Cost of Diversity: The Diversification Discount and Inefficient Investment," CRSP working papers 463, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  3. 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.
  4. Stanley D. Longhofer & Joao A.C. Santos, 2003. "The Paradox of Priority," Financial Management, Financial Management Association, vol. 32(1), Spring.
  5. Stewart C. Myers & Raghuram G. Rajan, 1998. "The Paradox of Liquidity," CRSP working papers 339, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  6. Kenneth Spong, 2000. "Banking regulation : its purposes, implementation, and effects," Monograph, Federal Reserve Bank of Kansas City, number 2000bria.
  7. 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.
  8. Anil K. Kashyap & Raghuram Rajan & Jeremy C. Stein, 2002. "Banks as Liquidity Providers: An Explanation for the Coexistence of Lending and Deposit-Taking," Journal of Finance, American Finance Association, vol. 57(1), pages 33-73, 02.
  9. Randall J. Pozdena, 1991. "Why banks need commerce powers," Economic Review, Federal Reserve Bank of San Francisco, issue Sum, pages 18-31.
  10. Mitchell Berlin & Kose John & Anthony Saunders, 1995. "Bank equity stakes in borrowing firms and financial distress," Working Papers 96-1, Federal Reserve Bank of Philadelphia.
  11. Robert H. Gertner & David S. Scharfstein & Jeremy C. Stein, 1994. "Internal versus External Capital Markets," NBER Working Papers 4776, National Bureau of Economic Research, Inc.
  12. Houston, Joel & James, Christopher & Marcus, David, 1997. "Capital market frictions and the role of internal capital markets in banking," Journal of Financial Economics, Elsevier, vol. 46(2), pages 135-164, November.
  13. Sun Bae Kim, 1992. "Corporate financing through a shareholder bank: lessons from Japan," Pacific Basin Working Paper Series 92-03, Federal Reserve Bank of San Francisco.
  14. Oliver Hart & John Moore, 1991. "A Theory of Debt Based on the Inalienability of Human Capital," STICERD - Theoretical Economics Paper Series /1991/233, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  15. John, Kose & John, Teresa A. & Saunders, Anthony, 1994. "Universal banking and firm risk-taking," Journal of Banking & Finance, Elsevier, vol. 18(2), pages 307-323, January.
  16. Santos, Joao A. C., 1999. "Bank capital and equity investment regulations," Journal of Banking & Finance, Elsevier, vol. 23(7), pages 1095-1120, July.
  17. Owen Lamont, 1996. "Cash Flow and Investment: Evidence from Internal Capital Markets," NBER Working Papers 5499, National Bureau of Economic Research, Inc.
  18. Mathias Dewatripont & Jean Tirole, 1994. "The prudential regulation of banks," ULB Institutional Repository 2013/9539, ULB -- Universite Libre de Bruxelles.
  19. Shleifer, Andrei & Vishny, Robert W, 1992. " Liquidation Values and Debt Capacity: A Market Equilibrium Approach," Journal of Finance, American Finance Association, vol. 47(4), pages 1343-66, September.
  20. Officer,Lawrence H., 2007. "Between the Dollar-Sterling Gold Points," Cambridge Books, Cambridge University Press, number 9780521038218.
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Citations

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Cited by:
  1. Santos, Joao A.C. & Rumble, Adrienne S., 2006. "The American keiretsu and universal banks: Investing, voting and sitting on nonfinancials' corporate boards," Journal of Financial Economics, Elsevier, vol. 80(2), pages 419-454, May.
  2. Laeven, Luc & Levine, Ross, 2005. "Is There a Diversification Discount in Financial Conglomerates?," CEPR Discussion Papers 5121, C.E.P.R. Discussion Papers.
  3. Arie L Melnik & Steven E. Plaut, 2007. "The Institutional Structure and the Cost of Bank Loans: an International Comparison," ICER Working Papers 22-2007, ICER - International Centre for Economic Research.
  4. 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.
  5. repec:hit:hcfrwp:1 is not listed on IDEAS
  6. Alexander Raskovich, 2008. "Should Banking Be Kept Separate from Commerce," EAG Discussions Papers 200809, Department of Justice, Antitrust Division.
  7. Delis, Manthos D & Gaganis, Chrysovalantis & Pasiouras, Fotios, 2009. "Bank liquidity and the board of directors," MPRA Paper 18872, University Library of Munich, Germany.
  8. Alexander Raskovich, 2008. "Should Banking Be Kept Separate from Commerce," EAG Competition Advocacy Papers 200809, Department of Justice, Antitrust Division.

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