Moral hazard under commercial and universal banking
AbstractMany claims have been made about the potential benefits, and the potential costs, of adopting a system of universal banking in the United States. We evaluate these claims using a model where there is a moral hazard problem between banks and “borrowers,” a moral hazard problem between banks and a deposit insurer, and a costly state verification problem. Under conditions we describe, allowing banks to take equity positions in firms strengthens their ability to extract surplus, and exacerbates problems of moral hazard. The incentives of universal banks to take equity positions will often be strongest when these problems are most severe.
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Bibliographic InfoPaper provided by Federal Reserve Bank of Minneapolis in its series Working Papers with number 585.
Date of creation: 1998
Date of revision:
Publication status: Published in Journal of Money, Credit, and Banking, Part 2 (Vol. 30, No. 3, August 1998, pp. 426-468)
Other versions of this item:
- 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.
- John H. Boyd & Chun Chang & Bruce D. Smith, 1998. "Moral hazard under commercial and universal banking," Proceedings, Federal Reserve Bank of Cleveland, issue Aug, pages 426-471.
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