IDEAS home Printed from https://ideas.repec.org/p/tin/wpaper/20130032.html
   My bibliography  Save this paper

Proprietary Trading and the Real Economy

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: http://papers.tinbergen.nl/13032.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Pierre Cahuc & Edouard Challe, 2012. "Produce Or Speculate? Asset Bubbles, Occupational Choice, And Efficiency," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(4), pages 1105-1131, November.
    2. Arping, Stefan, 2014. "Credit protection and lending relationships," Journal of Financial Stability, Elsevier, vol. 10(C), pages 7-19.
    3. Thomas Philippon & Ariell Reshef, 2012. "Wages and Human Capital in the U.S. Finance Industry: 1909--2006," The Quarterly Journal of Economics, Oxford University Press, vol. 127(4), pages 1551-1609.
    4. Stiroh, Kevin J. & Rumble, Adrienne, 2006. "The dark side of diversification: The case of US financial holding companies," Journal of Banking & Finance, Elsevier, vol. 30(8), pages 2131-2161, August.
    5. Stiroh, Kevin J, 2004. "Diversification in Banking: Is Noninterest Income the Answer?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(5), pages 853-882, October.
    6. Kevin M. Murphy & Andrei Shleifer & Robert W. Vishny, 1991. "The Allocation of Talent: Implications for Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 106(2), pages 503-530.
    7. Christine A. Parlour & Guillaume Plantin, 2008. "Loan Sales and Relationship Banking," Journal of Finance, American Finance Association, vol. 63(3), pages 1291-1314, June.
    8. Gyöngyi Lóránth & Alan D. Morrison, 2012. "Tying in Universal Banks," Review of Finance, European Finance Association, vol. 16(2), pages 481-516.
    9. Demirgüç-Kunt, Asli & Huizinga, Harry, 2010. "Bank activity and funding strategies: The impact on risk and returns," Journal of Financial Economics, Elsevier, vol. 98(3), pages 626-650, December.
    10. Allen, Franklin & Carletti, Elena, 2006. "Credit risk transfer and contagion," Journal of Monetary Economics, Elsevier, vol. 53(1), pages 89-111, January.
    11. Wagner, Wolf, 2007. "The liquidity of bank assets and banking stability," Journal of Banking & Finance, Elsevier, vol. 31(1), pages 121-139, January.
    12. Vincent Glode & Richard C. Green & Richard Lowery, 2012. "Financial Expertise as an Arms Race," Journal of Finance, American Finance Association, vol. 67(5), pages 1723-1759, October.
    13. Anat R. Admati & Peter M. DeMarzo & Martin F. Hellwig & Paul Pfleiderer, 2010. "Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity is Not Expensive," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2010_42, Max Planck Institute for Research on Collective Goods.
    14. Keeley, Michael C, 1990. "Deposit Insurance, Risk, and Market Power in Banking," American Economic Review, American Economic Association, vol. 80(5), pages 1183-1200, December.
    15. Patrick Bolton & Martin Oehmke, 2011. "Credit Default Swaps and the Empty Creditor Problem," Review of Financial Studies, Society for Financial Studies, vol. 24(8), pages 2617-2655.
    16. Stiroh, Kevin J., 2006. "A Portfolio View of Banking with Interest and Noninterest Activities," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(5), pages 1351-1361, August.
    17. Patrick Bolton & Tano Santos & Jose A. Scheinkman, 2016. "Cream-Skimming in Financial Markets," Journal of Finance, American Finance Association, vol. 71(2), pages 709-736, April.
    18. Demirguc-Kunt, Asli & Karacaovali, Baybars & Laeven, Luc, 2005. "Deposit insurance around the world : a comprehensive database," Policy Research Working Paper Series 3628, The World Bank.
    19. Arping, Stefan & Lóránth, Gyöngyi & Morrison, Alan D., 2010. "Public initiatives to support entrepreneurs: Credit guarantees versus co-funding," Journal of Financial Stability, Elsevier, vol. 6(1), pages 26-35, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Stefan Arping, 2015. "Banks and Market Liquidity," Tinbergen Institute Discussion Papers 15-020/IV, Tinbergen Institute.

    More about this item

    Keywords

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

    JEL classification:

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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:tin:wpaper:20130032. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Tinbergen Office +31 (0)10-4088900). General contact details of provider: http://edirc.repec.org/data/tinbenl.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.