The role of agency costs in financial conglomeration

Sylvain Bourjade and Ibolya Schindele

MPRA Paper from University Library of Munich, Germany

Abstract: This paper focuses on the role of managerial agency costs in financial conglomeration. We model conglomeration as the integration of commercial and investment banking in one organizational unit where bank managers accomplish both activities. We assume that managers differ in their abilities to undertake the individual tasks. The higher is a manager's ability in undertaking one task, the lower is her disutility of effort for that activity and the higher is her disutility of effort for the other task. When there is no managerial moral hazard, it is not optimal for the bank to form a conglomerate. We show that under managerial moral hazard, forming a conglomerate may be in the bank's interest because it may entail lower agency costs and a larger group of borrowers to fund.

Keywords: Financial Conglomerates; Commercial Banking; Investment Banking; Banking Organization; Multi-task; Moral Hazard (search for similar items in EconPapers)
JEL-codes: D82 G21 G24 (search for similar items in EconPapers)
Date: 2011
New Economics Papers: this item is included in nep-ban and nep-cta
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:34815

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