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Proprietary Trading and the Real Economy

Author

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  • Stefan Arping

    (University of Amsterdam)

Abstract

We embed proprietary trading into a model of bank lending. Opportunities to engage in purely speculative trading can harm the real economy. This is because banks, when devoting cheap but scarce deposits to lending rather than to gambling, must be compensated for giving up gambling rents. This makes corporate loans more costly, stifling real economic activity. Worse, gambling can crowd out lending, forcing firms to seek costly bond financing. By contrast, when trading is required for the provision of complementary banking services, banks may actually engage in too little trading. Ring-fencing trading can facilitate the efficient provision of banking services.

Suggested Citation

  • Stefan Arping, 2013. "Proprietary Trading and the Real Economy," Tinbergen Institute Discussion Papers 13-032/IV/DSF52, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20130032
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    File URL: https://papers.tinbergen.nl/13032.pdf
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    References listed on IDEAS

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    Cited by:

    1. Kurz, Michael & Kleimeier, Stefanie, 2019. "Credit Supply: Are there negative spillovers from banks’ proprietary trading? (RM/19/005-revised-)," Research Memorandum 026, Maastricht University, Graduate School of Business and Economics (GSBE).
    2. Kurz, Michael & Kleimeier, Stefanie, 2019. "Credit Supply: Are there negative spillovers from banks’ proprietary trading?," Research Memorandum 005, Maastricht University, Graduate School of Business and Economics (GSBE).
    3. Kurz, Michael & Kleimeier, Stefanie, 2019. "Credit Supply: Are there negative spillovers from banks’ proprietary trading?," Research Memorandum 005, Maastricht University, Graduate School of Business and Economics (GSBE).
    4. Stefan Arping, 2015. "Banks and Market Liquidity," Tinbergen Institute Discussion Papers 15-020/IV, Tinbergen Institute.

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    More about this item

    Keywords

    Proprietary Trading; Volcker Rule; Disintermediation; Shadow Banking; Depositor Preference; Safe Harbors; Covered Bonds; Ring-fencing; Financial Stability;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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