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Proprietary Trading and the Real Economy

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  • Stefan Arping

    (University of Amsterdam)

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    Abstract

    We embed proprietary trading into a model of bank lending. Opportunities to engage in purely speculative trading can harm the real economy. This is because banks, when devoting cheap but scarce deposits to lending rather than to gambling, must be compensated for giving up gambling rents. This makes corporate loans more costly, stifling real economic activity. Worse, gambling can crowd out lending, forcing firms to seek costly bond financing. By contrast, when trading is required for the provision of complementary banking services, banks may actually engage in too little trading. Ring-fencing trading can facilitate the efficient provision of banking services.

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    File URL: http://papers.tinbergen.nl/13032.pdf
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    Bibliographic Info

    Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 13-032/IV/DSF52.

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    Date of creation: 04 Mar 2013
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    Handle: RePEc:dgr:uvatin:20130032

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

    Related research

    Keywords: Proprietary Trading; Volcker Rule; Disintermediation; Shadow Banking; Depositor Preference; Safe Harbors; Covered Bonds; Ring-fencing; Financial Stability;

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    1. Demirguc-Kunt, Asli & Karacaovali, Baybars & Laeven, Luc, 2005. "Deposit insurance around the world : a comprehensive database," Policy Research Working Paper Series 3628, The World Bank.
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