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Moral hazard under commercial and universal banking

Author

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  • John H. Boyd
  • Chun Chang
  • Bruce D. Smith

Abstract

Many claims have been made about the potential benefits, and the potential costs, of adopting a system of universal banking in the United States. The authors 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 the authors 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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Suggested Citation

  • 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.
  • Handle: RePEc:fip:fedcpr:y:1998:i:aug:p:426-471
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    References listed on IDEAS

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    Keywords

    Banks and banking; Universal banks;

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