Close relationships between banks and firms: is it good or bad?
This paper investigates the issues involved in cross-ownership between banks and firms. The idea is that congruity among the parties in control of the bank and the firm allows to save on monitoring costs, but it gives rise to a conflict of interest between on one hand the parties in control of the bank and on the other hand the outside investors, as for example depositors, of the bank. Moreover, when monitoring of borrowing is important and unobservable by outsiders, there is interdependency among incentives, so that the conflict of interest may reduce even further incentives to monitor all other projects in the bank portfolio. Nevertheless, the paper shows that there are benefits from cross-ownership, whenever the bank involved in the relationship is debt financed and well diversified.
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- 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.
- Takeo Hoshi & Anil Kashyap & David Scharfstein, 1989.
"Bank Monitoring and Investment: Evidence from the Changing Structure of Japanese Corporate Banking Relationships,"
NBER Working Papers
3079, National Bureau of Economic Research, Inc.
- Takeo Hoshi & Anil Kashyap & David Scharfstein, 1990. "Bank Monitoring and Investment: Evidence from the Changing Structure of Japanese Corporate Banking Relationships," NBER Chapters, in: Asymmetric Information, Corporate Finance, and Investment, pages 105-126 National Bureau of Economic Research, Inc.
- Saunders, Anthony & Walter, Ingo, 1994. "Universal Banking in the United States: What Could We Gain? What Could We Lose?," OUP Catalogue, Oxford University Press, number 9780195080698.
- George J. Benston, 1994. "Universal Banking," Journal of Economic Perspectives, American Economic Association, vol. 8(3), pages 121-143, Summer.
- Gorton, Gary & Schmid, Frank A., 2000.
"Universal banking and the performance of German firms,"
Journal of Financial Economics,
Elsevier, vol. 58(1-2), pages 29-80.
- Gary Gorton & Frank A. Schmid, 1996. "Universal Banking and the Performance of German Firms," NBER Working Papers 5453, National Bureau of Economic Research, Inc.
- Kroszner, Randall S & Rajan, Raghuram G, 1994. "Is the Glass-Steagall Act Justified? A Study of the U.S. Experience with Universal Banking before 1933," American Economic Review, American Economic Association, vol. 84(4), pages 810-832, September.
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