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The Invisible Hand and the Banking Trade: Seigniorage, Risk-shifting and More

Author

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  • Miller, Marcus

    (University of Warwick)

  • Zhang, lei

    (University of Warwick)

Abstract

The classic Diamond-Dybvig model of banking assumes perfect competition and abstracts from issues of moral hazard,hardly appropriate when considering modern UK banking.We therefore modify the classic model to ncorporate franchise values due to market power; and risk-taking by banks with limited liability.We go further to show how the capacity of franchis evalues to mitigate risk taking maybe undermined by the bailout option; with explicit analytical results provided for the case of extreme risk-aversion.After a brief discussion of how this may impact on the distribution of income, we outline the ways in which the Vickers Report seeks to remedy these problems.

Suggested Citation

  • Miller, Marcus & Zhang, lei, 2013. "The Invisible Hand and the Banking Trade: Seigniorage, Risk-shifting and More," CAGE Online Working Paper Series 135, Competitive Advantage in the Global Economy (CAGE).
    • Handle: RePEc:cge:wacage:135
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    References listed on IDEAS

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    More about this item

    Keywords

    Money and banking; Seigniorage; Risk-taking; Bailouts; Regulation;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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