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Banking and commerce: a liquidity approach

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  • Joseph G. Haubrich
  • João A. C. Santos

Abstract

This paper looks at the advantages and disadvantages of mixing banking and commerce, using the "liquidity" approach to financial intermediation. Adding a commercial firm makes it easier for a bank to dispose of assets seized in a loan default. This "internal market" increases the liquidity of such assets and improves the bank's ability to perform financial intermediation. More generally, owning a commercial firm may act either as a substitute or a complement to commercial lending. In some cases, a bank will voluntarily refrain from making loans, choosing to become a nonbank bank in an unregulated environment.

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File URL: http://www.clevelandfed.org/Research/workpaper/1999/Wp9907.pdf
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Bibliographic Info

Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 9907.

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Date of creation: 1999
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Handle: RePEc:fip:fedcwp:9907

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Keywords: Nonbank financial institutions ; Bank liquidity;

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References

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  1. Raghuram Rajan & Henry Servaes & Luigi Zingales, . "The Cost of Diversity: The Diversification Discount and Inefficient Investment," CRSP working papers 463, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  2. Mitchell Berlin & Kose John & Anthony Saunders, 1995. "Bank equity stakes in borrowing firms and financial distress," Working Papers 96-1, Federal Reserve Bank of Philadelphia.
  3. Kenneth Spong, 2000. "Banking regulation : its purposes, implementation, and effects," Monograph, Federal Reserve Bank of Kansas City, number 2000bria.
  4. Hart, Oliver & Moore, John, 1994. "A Theory of Debt Based on the Inalienability of Human Capital," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 841-79, November.
  5. Owen Lamont, 1996. "Cash Flow and Investment: Evidence from Internal Capital Markets," NBER Working Papers 5499, National Bureau of Economic Research, Inc.
  6. João A.C. Santos, 1998. "Banking and commerce: how does the United States compare to other countries?," Economic Review, Federal Reserve Bank of Cleveland, issue Q IV, pages 14-26.
  7. Stewart C. Myers & Raghuram G. Rajan, 1998. "The Paradox of Liquidity," CRSP working papers 339, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  8. Mathias Dewatripont & Jean Tirole, 1994. "The prudential regulation of banks," ULB Institutional Repository 2013/9539, ULB -- Universite Libre de Bruxelles.
  9. Gertner, Robert H & Scharfstein, David S & Stein, Jeremy C, 1994. "Internal versus External Capital Markets," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 1211-30, November.
  10. Anil K. Kashyap & Raghuram Rajan & Jeremy C. Stein, 2002. "Banks as Liquidity Providers: An Explanation for the Coexistence of Lending and Deposit-Taking," Journal of Finance, American Finance Association, vol. 57(1), pages 33-73, 02.
  11. Boyd, John H & Chang, Chun & Smith, Bruce D, 1998. "Moral Hazard under Commercial and Universal Banking," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(3), pages 426-68, August.
  12. Officer,Lawrence H., 2007. "Between the Dollar-Sterling Gold Points," Cambridge Books, Cambridge University Press, number 9780521038218, April.
  13. Sun Bae Kim, 1992. "Corporate financing through a shareholder bank: lessons from Japan," Pacific Basin Working Paper Series 92-03, Federal Reserve Bank of San Francisco.
  14. Randall J. Pozdena, 1991. "Why banks need commerce powers," Economic Review, Federal Reserve Bank of San Francisco, issue Sum, pages 18-31.
  15. Saunders, Anthony, 1994. "Banking and commerce: An overview of the public policy issues," Journal of Banking & Finance, Elsevier, vol. 18(2), pages 231-254, January.
  16. John, Kose & John, Teresa A. & Saunders, Anthony, 1994. "Universal banking and firm risk-taking," Journal of Banking & Finance, Elsevier, vol. 18(2), pages 307-323, January.
  17. Houston, Joel & James, Christopher & Marcus, David, 1997. "Capital market frictions and the role of internal capital markets in banking," Journal of Financial Economics, Elsevier, vol. 46(2), pages 135-164, November.
  18. Shleifer, Andrei & Vishny, Robert W, 1992. " Liquidation Values and Debt Capacity: A Market Equilibrium Approach," Journal of Finance, American Finance Association, vol. 47(4), pages 1343-66, September.
  19. Stanley D. Longhofer & Joao A.C. Santos, 2003. "The Paradox of Priority," Financial Management, Financial Management Association, vol. 32(1), Spring.
  20. João Cabral dos Santos, 1995. "Bank capital and equity investment regulations," Working Paper 9515, Federal Reserve Bank of Cleveland.
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Citations

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Cited by:
  1. Laeven, Luc & Levine, Ross, 2005. "Is There a Diversification Discount in Financial Conglomerates?," CEPR Discussion Papers 5121, C.E.P.R. Discussion Papers.
  2. repec:hit:hcfrwp:1 is not listed on IDEAS
  3. João A.C. Santos, 1998. "Banking and commerce: how does the United States compare to other countries?," Economic Review, Federal Reserve Bank of Cleveland, issue Q IV, pages 14-26.
  4. Alexander Raskovich, 2008. "Should Banking Be Kept Separate from Commerce," EAG Competition Advocacy Papers 200809, Department of Justice, Antitrust Division.
  5. Arie L Melnik & Steven E. Plaut, 2007. "The Institutional Structure and the Cost of Bank Loans: an International Comparison," ICER Working Papers 22-2007, ICER - International Centre for Economic Research.
  6. Santos, Joao A.C. & Rumble, Adrienne S., 2006. "The American keiretsu and universal banks: Investing, voting and sitting on nonfinancials' corporate boards," Journal of Financial Economics, Elsevier, vol. 80(2), pages 419-454, May.
  7. Delis, Manthos D & Gaganis, Chrysovalantis & Pasiouras, Fotios, 2009. "Bank liquidity and the board of directors," MPRA Paper 18872, University Library of Munich, Germany.
  8. Alexander Raskovich, 2008. "Should Banking Be Kept Separate from Commerce," EAG Discussions Papers 200809, Department of Justice, Antitrust Division.

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