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Default, Bailouts and the Vertical Structure of Financial Intermediaries

Author

Listed:
  • Tatiana Damjanovic

    () (Durham Business School)

  • Vladislav Damjanovic

    () (Durham Business School)

  • Charles Nolan

    () (Adam Smith Business School, University of Glasgow)

Abstract

Should we break up banks and limit bailouts? We study vertical integration of deposit-taking institutions and those investing in risky equity. Integration, by eliminating a credit spread, increases output but entails larger, more frequent bailouts. Bailouts of leveraged institutions boost economic activity but are costly. The optimal structure of intermediaries depends largely on the efficiency of government intervention, the competitiveness of the Önancial sector and shocks hitting the economy. Separated institutions are preferred when profit margins are small, financial shocks systemic and volatile, and bailouts costly. For a baseline calibration, universal banks are typically preferred.

Suggested Citation

  • Tatiana Damjanovic & Vladislav Damjanovic & Charles Nolan, 2019. "Default, Bailouts and the Vertical Structure of Financial Intermediaries," Working Papers 2019_04, Durham University Business School.
  • Handle: RePEc:dur:durham:2019_04
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    References listed on IDEAS

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    Cited by:

    1. Alfred Duncan & Charles Nolan, 2017. "Financial Frictions in Macroeconomic Models," Studies in Economics 1719, School of Economics, University of Kent.

    More about this item

    Keywords

    Financial intermediation in DSGE models; Vertical structure of financial intermediary; separation of retail and investment banks; bailouts; trade-off between financial stability and efficiency.;

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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