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Tying in Universal Banks

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  • Gyöngyi Lóránth
  • Alan D. Morrison

Abstract

This paper examines the tying of lending to investment banking business by universal banks. Tying may alleviate credit rationing by assuring the lender of an adequate share of the social surplus that its lending generates; however, tying raises the profitability of loans to troubled entrepreneurs, softening entrepreneurial budget constraints and reducing effort levels. When investment banking is uncompetitive, the former effect dominates, and there is too little tying; when investment banking is competitive, there is too much tying. We relate our results to the authority structure of the universal bank, which we argue is the appropriate focus for regulation. Copyright 2012, Oxford University Press.

Suggested Citation

  • Gyöngyi Lóránth & Alan D. Morrison, 2012. "Tying in Universal Banks," Review of Finance, European Finance Association, vol. 16(2), pages 481-516.
  • Handle: RePEc:oup:revfin:v:16:y:2012:i:2:p:481-516
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    Cited by:

    1. Choi, Jay Pil & Stefanadis, Christodoulos, 2015. "Monitoring, cross subsidies, and universal banking," International Journal of Industrial Organization, Elsevier, vol. 43(C), pages 48-55.
    2. Stefan Arping, 2013. "Proprietary Trading and the Real Economy," Tinbergen Institute Discussion Papers 13-032/IV/DSF52, Tinbergen Institute.
    3. Stefan Arping, 2012. "Banking Competition and Soft Budget Constraints: How Market Power can threaten Discipline in Lending," Tinbergen Institute Discussion Papers 12-146/IV/DSF49, Tinbergen Institute.

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