Bank Diversification and Incentives

Alan Morrison and Lóránth, Gyöngyi

No 7051, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper analyzes the consequences of bank diversification into fee-based businesses. Universal banks raise welfare by expanding the range of services available to entrepreneurs. However, because they may choose to rescue failed entrepreneurs in order to sell them fee-based financial services, universal banks provide weaker incentives. Adopting a holding company structure and devolving liquidation decisions to the lending division partially resolves this problem. We demonstrate a relationship between the welfare effects of diversification and competition for fee-based business, and we analyze the tying of lending and fee-based business. Our analysis yields several testable implications.

Keywords: Bank diversification; Soft budget constraint; Tying; Universal banks (search for similar items in EconPapers)
JEL-codes: G20 G21 G34 (search for similar items in EconPapers)
Date: 2008-11
New Economics Papers: this item is included in nep-ban and nep-bec
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