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When bigger isn’t better: bailouts and bank behaviour

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Author Info

  • Miller, Marcus

    (University of Warwick)

  • Zhang, Lei

    (University of Warwick)

  • Li, Han Hao

    (University of Warwick)

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    Abstract

    Lending retail deposits to SMEs and household borrowers may be the traditional role of commercial banks: but banking in Britain has been transformed by increasing consolidation and by the lure of high returns available from wholesale Investment activities. With appropriate changes to the baseline model of commercial banking in Allen and Gale (2007), we show how market power enables banks to collect „seigniorage?; and how „tail risk? investment allows losses to be shifted onto the taxpayer. In principle, the high franchise values associated with market power assist regulatory capital requirements to check risk-taking. But when big banks act strategically, bailout expectations can undermine these disciplining devices: and the taxpayer ends up „on the hook?- as in the recent crisis. That structural change is needed to prevent a repeat seems clear from the Vickers report, which proposes to protect the taxpayer by a „ring fence?separating commercial and investment banking.

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    Bibliographic Info

    Paper provided by Competitive Advantage in the Global Economy (CAGE) in its series CAGE Online Working Paper Series with number 66.

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    Date of creation: 2011
    Date of revision:
    Handle: RePEc:cge:wacage:66

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    Web page: http://www2.warwick.ac.uk/fac/soc/economics/research/centres/cage/
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    Related research

    Keywords: Money and banking; Seigniorage; Risk-taking; Bailouts; Regulation;

    References

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    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.:
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    1. Bhattacharya, Sudipto, 1982. " Aspects of Monetary and Banking Theory and Moral Hazard," Journal of Finance, American Finance Association, vol. 37(2), pages 371-84, May.
    2. Roberto Chang & Andrés Velasco, 2001. "A Model Of Financial Crises In Emerging Markets," The Quarterly Journal of Economics, MIT Press, vol. 116(2), pages 489-517, May.
    3. John H. Boyd & Gianni De Nicolã, 2005. "The Theory of Bank Risk Taking and Competition Revisited," Journal of Finance, American Finance Association, vol. 60(3), pages 1329-1343, 06.
    4. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
    5. Kevin C. Murdock & Thomas F. Hellmann & Joseph E. Stiglitz, 2000. "Liberalization, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough?," American Economic Review, American Economic Association, vol. 90(1), pages 147-165, March.
    6. Bryant, John, 1980. "A model of reserves, bank runs, and deposit insurance," Journal of Banking & Finance, Elsevier, vol. 4(4), pages 335-344, December.
    7. 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(2), pages 1-74.
    8. Xavier Freixas & Jean-Charles Rochet, 2008. "Microeconomics of Banking, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262062704, December.
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    Cited by:
    1. repec:cge:warwcg:134 is not listed on IDEAS
    2. Powell, Andrew & Maier, Antonia & Miller, Marcus, 2012. "Prudent Banks and Creative Mimics: Can we tell the difference?," CAGE Online Working Paper Series 76, Competitive Advantage in the Global Economy (CAGE).
    3. Miller, Marcus & Zhang, lei, 2013. "The Invisible Hand and the Banking Trade: Seigniorage, Risk-shifting and More," CAGE Online Working Paper Series 135, Competitive Advantage in the Global Economy (CAGE).

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