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Universal banking, competition and risk in a macro model

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  • Damjanovic, Tatiana
  • Damjanovic, Vladislav
  • Nolan, Charles

Abstract

A stylized macroeconomic model is developed with an indebted, heterogeneous Investment Banking Sector funded by borrowing from a retail banking sector. The government guarantees retail deposits. Investment banks choose how risky their activities should be. We compared the benefits of separated vs. universal banking modelled as a vertical integration of the retail and investment banks. The incidence of banking default is considered under different constellations of shocks and degrees of competitiveness. The benefits of universal banking rise in the volatility of idiosyncratic shocks to trading strategies and are positive even for very bad common shocks, even though government bailouts, which are costly, are larger compared to the case of separated banking entities. The welfare assessment of the structure of banks may depend crucially on the kinds of shock hitting the economy as well as on the efficiency of government intervention.

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Bibliographic Info

Paper provided by Scottish Institute for Research in Economics (SIRE) in its series SIRE Discussion Papers with number 2012-19.

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Date of creation: 2012
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Handle: RePEc:edn:sirdps:322

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Keywords: Risk in DSGE models; investment banking; financial intermediation; separating commercial and investment banking; competition and risk; moral hazard in banking; prudential regulation; systematic vs. idiosyncratic risks.;

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  1. Boot, Arnoud W A & Thakor, Anjan V, 1997. "Banking Scope and Financial Innovation," Review of Financial Studies, Society for Financial Studies, vol. 10(4), pages 1099-1131.
  2. Repullo, Rafael, 2004. "Capital requirements, market power, and risk-taking in banking," Journal of Financial Intermediation, Elsevier, vol. 13(2), pages 156-182, April.
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Cited by:
  1. HAKIMI Abdelaziz & Ahmet DKHILI Hichem & KHLAIFIA Wafa, 2012. "Universal Banking and Credit Risk: Evidence from Tunisia," International Journal of Economics and Financial Issues, Econjournals, vol. 2(4), pages 496-504.

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