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When bigger isn’t better: Bail outs and bank behaviour

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  • Li, Han Hao
  • Miller, Marcus
  • Zhang, Lei

Abstract

The traditional theory of commercial banking explains maturity transformation and liquidity provision assuming no asymmetric information and no excess profits. It captures the possibility of bank runs and business cycle risk; but it ignores the moral hazard problems connected with risk-taking by large banks counting on state bail outs. In this paper market concentration and risk-shifting is incorporated in an analytically tractable fashion; and the modified framework is used to consider measures to restore competition and stability--including, in particular, those recommended for the UK by the Independent Commission on Banking (2011), chaired by Sir John Vickers.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8602.

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Date of creation: Oct 2011
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Handle: RePEc:cpr:ceprdp:8602

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Related research

Keywords: bailouts; money and banking; regulation; risk-taking; seigniorage;

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References

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  1. Augusto de la Torre & Alain Ize, 2010. "Containing Systemic Risk: Paradigm-Based Perspectives on Regulatory Reform," Journal of LACEA Economia, LACEA - LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION.
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  5. Inklaar, R. & Colangelo, A., 2010. "Banking sector output measurement in the euro area – a modified approach," GGDC Research Memorandum GD-117, Groningen Growth and Development Centre, University of Groningen.
  6. Hester, D D, 1982. " Aspects of Monetary and Banking Theory and Moral Hazard: Discussion," Journal of Finance, American Finance Association, vol. 37(2), pages 395-97, May.
  7. Olivier De Jonghe, 2009. "Back to the basics in banking ? A micro-analysis of banking system stability," Working Paper Research 167, National Bank of Belgium.
  8. Xavier Freixas & Jean-Charles Rochet, 2008. "Microeconomics of Banking, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262062704.
  9. Dell'Ariccia, Giovanni & Marquez, Robert, 2004. "Information and bank credit allocation," Journal of Financial Economics, Elsevier, vol. 72(1), pages 185-214, April.
  10. 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.
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Cited by:
  1. Powell, Andrew & Maier, Antonia & Miller, Marcus, 2012. "Prudent Banks and Creative Mimics: Can we tell the difference?," CAGE Online Working Paper Series 75, Competitive Advantage in the Global Economy (CAGE).

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