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Do Public Banks have a Competitive Advantage?

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  • Astrid Matthey

Abstract

Private banks often blame state guarantees to distort competition by giv- ing public banks the advantage of lower funding costs. In this paper I show that if borrowers perceive the public bank as supporting economic develop- ment, private banks may be able to separate firms by self selection, enter the market, and obtain profits in equilibrium despite their cost disadvantage. The public bank's competitive advantage may be offset, independently of what its true objective function is. Even perfect competition between private banks does not lead to zero profits.

Suggested Citation

  • Astrid Matthey, 2008. "Do Public Banks have a Competitive Advantage?," SFB 649 Discussion Papers SFB649DP2008-010, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  • Handle: RePEc:hum:wpaper:sfb649dp2008-010
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    References listed on IDEAS

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    Cited by:

    1. Başçi, Eşref Savaş & Sakinç, Öznur, 2014. "Determinants of Bank Profitability in Turkey: An Empirical Analysis on Types of Banking from 2002 to 2012," EconStor Open Access Articles, ZBW - German National Library of Economics, pages 3-6.
    2. Höwer, Daniel, 2016. "The role of bank relationships when firms are financially distressed," Journal of Banking & Finance, Elsevier, vol. 65(C), pages 59-75.
    3. Höwer, Daniel, 2009. "From soft and hard-nosed bankers: bank lending strategies and the survival of financially distressed firms," ZEW Discussion Papers 09-059, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    4. Höwer, Daniel, 2013. "Corporate main bank decision," ZEW Discussion Papers 13-018, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.

    More about this item

    Keywords

    public banks; state guarantee; self-selection;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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