Universal banking, competition and risk in a macro model
AbstractA 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 InfoPaper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Working Paper Series with number 201205.
Date of creation: 17 Jan 2012
Date of revision:
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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.;
Other versions of this item:
- Damjanovic, Tatiana & Damjanovic, Vladislav & Nolan, Charles, 2012. "Universal banking, competition and risk in a macro model," SIRE Discussion Papers 2012-19, Scottish Institute for Research in Economics (SIRE).
- Tatiana Damjanovic & Vladislav Damjanovic & Charles Nolan, 2012. "Universal banking, competition and risk in a macro model," Discussion Papers 1201, Exeter University, Department of Economics.
- E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-07-01 (All new papers)
- NEP-BAN-2012-07-01 (Banking)
- NEP-CBA-2012-07-01 (Central Banking)
- NEP-DGE-2012-07-01 (Dynamic General Equilibrium)
- NEP-MAC-2012-07-01 (Macroeconomics)
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