Market Discipline in Conglomerate Banks: Is an Internal Allocation of Cost of Capital Necessary as Incentive Device

Arnoud Boot and Anjolein Schmeits

No 125, William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan

Abstract: This paper analyzes the optimal conglomeration of bank activities. We show that the effectiveness of market discipline for stand-alone activities (divisions) is of crucial importance for the potential benefits of conglomeration. We find that effective market discipline reduces the potential benefits of conglomeration. With ineffective market discipline of stand-alone activities conglomeration would further undermine market discipline, but may nevertheless be beneficial. In particular, when rents are not too high the diversification benefits of conglomeration may dominate the negative incentive effects. A more competitive environment therefore may induce conglomeration. We also show that introducing internal cost of allocation schemes may create 'internal' market discipline that complements the weak external market discipline of the conglomerate. In this context we show that these schemes should respond to actual risk choices, rather than be limited to anticipated risk choices.

Pages: pages
Date: 1997-11-01
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.wdi.umich.edu/files/Publications/WorkingPapers/wp125.pdf
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://www.wdi.umich.edu/files/Publications/WorkingPapers/wp125.pdf [302 Found]--> https://wdi.umich.edu/files/Publications/WorkingPapers/wp125.pdf)

Related works:
Working Paper: Market Discipline in Conglomerate Banks: Is an Internal Allocation of Cost of Capital Necessary as an Incentive Device? (1996)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wdi:papers:1997-125

Access Statistics for this paper

More papers in William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan 724 E. University Ave, Wyly Hall 1st Flr, Ann Arbor MI 48109. Contact information at EDIRC.
Bibliographic data for series maintained by WDI ().