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Do public banks have a competitive advantage?

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  • Astrid Matthey

Abstract

Public banks are often blamed to possess an unfair competitive advantage in the form of lower funding costs due to a state guarantee on their deposits. However, public and private banks tend to differ not only in their funding costs, but also in the way they deal with borrowers in financial distress. The model presented in this paper shows that if banks differ in these two characteristics, a separation of borrowers may result, with public banks lending to risky firms and private banks lending to safe firms. This separation can explain differences in the lending behavior and performance of public and private banks as observed in the market. Interestingly, the separation may persist even when funding costs are equal, implying that an abolition of state guarantees will not necessarily lead to identical performance of the two types of banks.

Suggested Citation

  • Astrid Matthey, 2010. "Do public banks have a competitive advantage?," The European Journal of Finance, Taylor & Francis Journals, vol. 16(1), pages 45-55.
    • Handle: RePEc:taf:eurjfi:v:16:y:2010:i:1:p:45-55
    DOI: 10.1080/13518470902853475
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    Cited by:

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    2. Höwer, Daniel, 2009. "From soft and hard-nosed bankers: bank lending strategies and the survival of financially distressed firms," ZEW Discussion Papers 09-059, ZEW - Leibniz Centre for European Economic Research.
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    4. Höwer, Daniel, 2013. "Corporate main bank decision," ZEW Discussion Papers 13-018, ZEW - Leibniz Centre for European Economic Research.

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    More about this item

    Keywords

    public banks; state guarantee; self-selection;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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