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Banking and Commerce: A Liquidity Approach

Author

Listed:
  • Haubrich, J.G.
  • Santos, J.A.C.

Abstract

This paper looks at the advantages and disadvantages of mixing banking and commerce, using the "liquidity" approach to financial intermediation. Adding a commercial firm makes it easier for a bank to dispose of assets seized in a loan default. This 'internal market' increases the liquidity of such assets and improves the bank's ability to perform financial intermediation. More generally, owning a commercial 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.

Suggested Citation

  • Haubrich, J.G. & Santos, J.A.C., 1999. "Banking and Commerce: A Liquidity Approach," Papers 9907, London School of Economics - Centre for Labour Economics.
  • Handle: RePEc:fth:lseple:9907
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    References listed on IDEAS

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    1. 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.
    2. 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 1343-1366, September.
    3. Lamont, Owen, 1997. " Cash Flow and Investment: Evidence from Internal Capital Markets," Journal of Finance, American Finance Association, vol. 52(1), pages 83-109, March.
    4. Robert H. Gertner & David S. Scharfstein & Jeremy C. Stein, 1994. "Internal versus External Capital Markets," NBER Working Papers 4776, National Bureau of Economic Research, Inc.
    5. Stanley D. Longhofer & Joao A.C. Santos, 2003. "The Paradox of Priority," Financial Management, Financial Management Association, vol. 32(1), Spring.
    6. Mathias Dewatripont & Jean Tirole, 1994. "The prudential regulation of banks," ULB Institutional Repository 2013/9539, ULB -- Universite Libre de Bruxelles.
    7. Stewart C. Myers & Raghuram G. Rajan, 1998. "The Paradox of Liquidity," The Quarterly Journal of Economics, Oxford University Press, vol. 113(3), pages 733-771.
    8. Raghuram Rajan & Henri Servaes & Luigi Zingales, 2000. "The Cost of Diversity: The Diversification Discount and Inefficient Investment," Journal of Finance, American Finance Association, vol. 55(1), pages 35-80, February.
    9. Robert H. Gertner & David S. Scharfstein & Jeremy C. Stein, 1994. "Internal versus External Capital Markets," The Quarterly Journal of Economics, Oxford University Press, vol. 109(4), pages 1211-1230.
    10. 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.
    11. 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.
    12. Kenneth Spong, 2000. "Banking regulation : its purposes, implementation, and effects," Monograph, Federal Reserve Bank of Kansas City, number 2000bria, Jan 17.
    13. Santos, Joao A. C., 1999. "Bank capital and equity investment regulations," Journal of Banking & Finance, Elsevier, vol. 23(7), pages 1095-1120, July.
    14. Randall J. Pozdena, 1991. "Why banks need commerce powers," Economic Review, Federal Reserve Bank of San Francisco, issue Sum, pages 18-31.
    15. 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, February.
    16. 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.
    17. 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.
    18. Oliver Hart & John Moore, 1994. "A Theory of Debt Based on the Inalienability of Human Capital," The Quarterly Journal of Economics, Oxford University Press, vol. 109(4), pages 841-879.
    19. 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.
    20. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Laeven, Luc & Levine, Ross, 2007. "Is there a diversification discount in financial conglomerates?," Journal of Financial Economics, Elsevier, vol. 85(2), pages 331-367, August.
    2. Santos, Joao A.C. & Rumble, Adrienne S., 2006. "The American keiretsu and universal banks: Investing, voting and sitting on nonfinancials' corporate boards," Journal of Financial Economics, Elsevier, vol. 80(2), pages 419-454, May.
    3. Delis, Manthos D & Gaganis, Chrysovalantis & Pasiouras, Fotios, 2009. "Bank liquidity and the board of directors," MPRA Paper 18872, University Library of Munich, Germany.
    4. Arie L Melnik & Steven E. Plaut, 2007. "The Institutional Structure and the Cost of Bank Loans: an International Comparison," ICER Working Papers 22-2007, ICER - International Centre for Economic Research.
    5. repec:hit:hcfrwp:1 is not listed on IDEAS
    6. Alexander Raskovich, 2008. "Should Banking Be Kept Separate from Commerce," EAG Competition Advocacy Papers 200809, Department of Justice, Antitrust Division.
    7. Konishi, Masaru, 2012. "Equity Investment Regulation and Bank Risk: Evidence from Japanese Commercial Banks," Working Paper Series G-1-1, Center for Financial Research, Graduate School of Commerce and Management, Hitotsubashi University.
    8. Alexander Raskovich, 2008. "Should Banking Be Kept Separate from Commerce," EAG Discussions Papers 200809, Department of Justice, Antitrust Division.
    9. 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.

    More about this item

    Keywords

    BANKING ; FINANCIAL MARKET;

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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