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Bank Ownership and Financial Stability

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  • Enrico Perotti

    (University of Amsterdam)

  • Marcel Vorage

    (University of Amsterdam)

Abstract

We study a politician's choice for state or private control of banks. The choice trades of lobbying contributions against social welfare, weighted by political accountability.Politicians facing few constraints prefer state control to maximize their rents. As state banks are less efficient, at higher level of accountability there is a shift to private control. At the transition point there is a jumpin risk taking, as private banks do not internalize the social costs of bank failure. To discourage private risk taking, the politician leaves more rentsto private banks.We conclude with some suggestive data complementing existing evidence that financial instability is highest when bank control is capturedby small lobbies.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 10-022/2.

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Date of creation: 19 Feb 2010
Date of revision: 11 Sep 2010
Handle: RePEc:dgr:uvatin:20100022

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Web page: http://www.tinbergen.nl

Related research

Keywords: Political Economy; Bank Control; Lobbying; Instability;

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