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On the effects of banks’ equity ownership on credit markets : an antitrust perspective on the Glass-Steagall act

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  • AMIR, Rabah
  • TROGE, Michael

Abstract

Recent U.S. legislation (Gramm-Leach-Bliley Act) allows commercial banks to enter merchant banking, i.e. hold equity in non-financial firms. A stylised auction-theoretic model is developed to investigate the effects of bank equity stakes in firms on the competition in bank loans. The main finding is that the largest stake confers a competitive advantage to the holding bank and constitutes a barrier to entry in equity acquisition, resulting in high interest rates charged to firms. This finding unearths an antitrust dimension in the controversial debate on the separation of banking and commerce in the U.S., and provides a theoretical basis for recent empirical evidence on the relationship between bank equity holdings and the cost of debt finance in Germany and Japan.

Suggested Citation

  • AMIR, Rabah & TROGE, Michael, 2004. "On the effects of banks’ equity ownership on credit markets : an antitrust perspective on the Glass-Steagall act," LIDAM Discussion Papers CORE 2004038, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvco:2004038
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    File URL: https://sites.uclouvain.be/core/publications/coredp/coredp2004.html
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    References listed on IDEAS

    as
    1. White, Eugene Nelson, 1986. "Before the Glass-Steagall Act: An analysis of the investment banking activities of national banks," Explorations in Economic History, Elsevier, vol. 23(1), pages 33-55, January.
    2. Kroszner, Randall S & Rajan, Raghuram G, 1994. "Is the Glass-Steagall Act Justified? A Study of the U.S. Experience with Universal Banking before 1933," American Economic Review, American Economic Association, vol. 84(4), pages 810-832, September.
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    More about this item

    Keywords

    banking and commerce; regulation and antitrust; Glass-Steagall act; Gramm-Leach-Bliley act; auctions;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General

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