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Bank Diversification and Incentives

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  • Lóránth, Gyöngyi
  • Morrison, Alan
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    Abstract

    This paper analyzes the consequences of bank diversification into fee-based businesses. Universal banks raise welfare by expanding the range of services available to entrepreneurs. However, because they may choose to rescue failed entrepreneurs in order to sell them fee-based financial services, universal banks provide weaker incentives. Adopting a holding company structure and devolving liquidation decisions to the lending division partially resolves this problem. We demonstrate a relationship between the welfare effects of diversification and competition for fee-based business, and we analyze the tying of lending and fee-based business. Our analysis yields several testable implications.

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    Bibliographic Info

    Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7051.

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    Date of creation: Nov 2008
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    Handle: RePEc:cpr:ceprdp:7051

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    Related research

    Keywords: Bank diversification; soft budget constraint; tying; universal banks;

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