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Banking and commerce: a liquidity approach

  • João A. C. Santos

    (Federal Reserve Bank of New York)

  • Joseph G. Haubrich

    (Federal Reserve Bank of Cleveland - Research Department)

This paper looks at the advantages and disadvantages of mixing banking and commerce, using the "liquidity" approach to financial intermediation. Bringing a non-financial firm into a banking conglomerate may be advantageous because it may make it easier for the bank to dispose of assets seized in a loan default. The internal market formed inside the banking and commerce conglomerate increases the liquidity of such assets and improves the bank's ability to perform financial intermediation. More generally, owning a non-financial firm may act either as a substitute or a complement to commercial lending. In some cases, a bank will voluntarily refrain from making loans, choosing to become a non-bank bank in an unregulated environment.

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Paper provided by Bank for International Settlements in its series BIS Working Papers with number 78.

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Length: 34 pages
Date of creation: Oct 1999
Date of revision:
Handle: RePEc:bis:biswps:78
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  1. Oliver Hart & John Moore, 1991. "A Theory of Debt Based on the Inalienability of Human Capital," NBER Working Papers 3906, National Bureau of Economic Research, Inc.
  2. Anil K. Kashyap & Raghuram Rajan & Jeremy C. Stein, 2002. "Banks as Liquidity Providers: An Explanation for the Coexistence of Lending and Deposit-Taking," Journal of Finance, American Finance Association, vol. 57(1), pages 33-73, 02.
  3. Berlin, Mitchell & John, Kose & Saunders, Anthony, 1996. "Bank Equity Stakes in Borrowing Firms and Financial Distress," Review of Financial Studies, Society for Financial Studies, vol. 9(3), pages 889-919.
  4. Sun Bae Kim, 1992. "Corporate financing through a shareholder bank: lessons from Japan," Pacific Basin Working Paper Series 92-03, Federal Reserve Bank of San Francisco.
  5. Gertner, Robert H & Scharfstein, David S & Stein, Jeremy C, 1994. "Internal versus External Capital Markets," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 1211-30, November.
  6. 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.
  7. Rajan, Raghuram G & Servaes, Henri & Zingales, Luigi, 1998. "The Cost of Diversity: The Diversification Discount and Inefficient Investment," CEPR Discussion Papers 1801, C.E.P.R. Discussion Papers.
  8. João A.C. Santos, 1998. "Banking and commerce: how does the United States compare to other countries?," Economic Review, Federal Reserve Bank of Cleveland, issue Q IV, pages 14-26.
  9. Mathias Dewatripont & Jean Tirole, 1994. "The prudential regulation of banks," ULB Institutional Repository 2013/9539, ULB -- Universite Libre de Bruxelles.
  10. Stewart C. Myers & Raghuram G. Rajan, 1998. "The Paradox Of Liquidity," The Quarterly Journal of Economics, MIT Press, vol. 113(3), pages 733-771, August.
  11. repec:cup:cbooks:9780521038218 is not listed on IDEAS
  12. 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.
  13. Shleifer, Andrei & Vishny, Robert W, 1992. " Liquidation Values and Debt Capacity: A Market Equilibrium Approach," Journal of Finance, American Finance Association, vol. 47(4), pages 1343-66, September.
  14. Stanley D. Longhofer & Joao A.C. Santos, 2003. "The Paradox of Priority," Financial Management, Financial Management Association, vol. 32(1), Spring.
  15. João Cabral dos Santos, 1995. "Bank capital and equity investment regulations," Working Paper 9515, Federal Reserve Bank of Cleveland.
  16. Kenneth Spong, 1994. "Banking regulation : its purpose, implementation, and effects," Monograph, Federal Reserve Bank of Kansas City, number 1994bria.
  17. Owen Lamont, 1996. "Cash Flow and Investment: Evidence from Internal Capital Markets," NBER Working Papers 5499, National Bureau of Economic Research, Inc.
  18. John, Kose & John, Teresa A. & Saunders, Anthony, 1994. "Universal banking and firm risk-taking," Journal of Banking & Finance, Elsevier, vol. 18(2), pages 307-323, January.
  19. Randall J. Pozdena, 1991. "Why banks need commerce powers," Economic Review, Federal Reserve Bank of San Francisco, issue Sum, pages 18-31.
  20. Houston, Joel & James, Christopher & Marcus, David, 1997. "Capital market frictions and the role of internal capital markets in banking," Journal of Financial Economics, Elsevier, vol. 46(2), pages 135-164, November.
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