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The Threat of Capital Drain: A Rationale for Regional Public Banks?

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Listed:
  • Hendrik Hakenes
  • Isabel Schnabel

Abstract

This paper yields a rationale for why subsidized public banks may increase regional welfare in a financially integrated economy. We present a model with credit rationing and heterogeneous regions in which public banks prevent a capital drain from poorer to richer regions by subsidizing local depositors, for example, through public guarantees. Under some conditions, cooperative banks can perform the same function without any subsidies; however, they may be crowded out by public banks. We also discuss the influence of the political structure on the emergence of public banks in simple political-economy settings and the role of interregional mobility.

Suggested Citation

  • Hendrik Hakenes & Isabel Schnabel, 2010. "The Threat of Capital Drain: A Rationale for Regional Public Banks?," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 166(4), pages 662-689, December.
  • Handle: RePEc:mhr:jinste:urn:sici:0932-4569(201012)166:4_662:ttocda_2.0.tx_2-i
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    Citations

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    Cited by:

    1. Bülbül, Dilek, 2013. "Determinants of trust in banking networks," Journal of Economic Behavior & Organization, Elsevier, vol. 85(C), pages 236-248.
    2. Höwer, Daniel, 2016. "The role of bank relationships when firms are financially distressed," Journal of Banking & Finance, Elsevier, vol. 65(C), pages 59-75.
    3. repec:bla:ecnote:v:46:y:2017:i:3:p:527-554 is not listed on IDEAS
    4. Hendrik Hakenes & Iftekhar Hasan & PhilIP Molyneux & Ru Xie, 2015. "Small Banks and Local Economic Development," Review of Finance, European Finance Association, vol. 19(2), pages 653-683.

    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • L33 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Comparison of Public and Private Enterprise and Nonprofit Institutions; Privatization; Contracting Out

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