The Invisible Hand and the Banking Trade: Seigniorage, Risk-shifting and More
AbstractThe classic Diamond-Dybvig model of banking assumes perfect competition and abstracts from issues of moral hazard,hardly appropriate when considering modern UK banking.We therefore modify the classic model to ncorporate franchise values due to market power; and risk-taking by banks with limited liability.We go further to show how the capacity of franchis evalues to mitigate risk taking maybe undermined by the bailout option; with explicit analytical results provided for the case of extreme risk-aversion.After a brief discussion of how this may impact on the distribution of income, we outline the ways in which the Vickers Report seeks to remedy these problems.
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Bibliographic InfoPaper provided by Competitive Advantage in the Global Economy (CAGE) in its series CAGE Online Working Paper Series with number 134.
Date of creation: 2013
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Money and banking; Seigniorage; Risk-taking; Bailouts; Regulation;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-08-16 (All new papers)
- NEP-BAN-2013-08-16 (Banking)
- NEP-COM-2013-08-16 (Industrial Competition)
- NEP-CTA-2013-08-16 (Contract Theory & Applications)
- NEP-SPO-2013-08-16 (Sports & Economics)
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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- Li, Han Hao & Miller, Marcus & Zhang, Lei, 2011.
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CEPR Discussion Papers
8602, C.E.P.R. Discussion Papers.
- Miller, Marcus & Zhang, Lei & Li, Han Hao, 2011. "When bigger isn’t better: bailouts and bank behaviour," CAGE Online Working Paper Series 65, Competitive Advantage in the Global Economy (CAGE).
- 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.
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