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The Threat of Capital Drain: A Rationale for Public Banks?

  • Hendrik Hakenes

    ()

    (Max Planck Institute for Research on Collective Goods, Bonn)

  • Isabel Schnabel

    ()

    (Max Planck Institute for Research on Collective Goods, Bonn)

This paper yields a rationale for why subsidized public banks may be desirable from a regional perspective in a financially integrated economy. We present a model with credit rationing and heterogeneous regions in which public banks prevent a capital drain from poorer to richer regions by subsidizing local depositors, for example, through a public guarantee. Under some conditions, cooperative banks can perform the same function without any subsidization; however, they may be crowded out by public banks. We also discuss the impact of the political structure on the emergence of public banks in a political-economy setting and the role of interregional mobility.

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Paper provided by Max Planck Institute for Research on Collective Goods in its series Working Paper Series of the Max Planck Institute for Research on Collective Goods with number 2006_11.

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Length: 36 pages
Date of creation: Apr 2006
Date of revision:
Handle: RePEc:mpg:wpaper:2006_11
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