The Threat of Capital Drain: A Rationale for Regional Public Banks?

Hendrik Hakenes and Isabel Schnabel

Journal of Institutional and Theoretical Economics (JITE), 2010, vol. 166, issue 4, 662-689

Abstract: This paper yields a rationale for why subsidized public banks may increase regional welfare in a financially integrated economy. We present a model with credit rationing and heterogeneous regions in which public banks prevent a capital drain from poorer to richer regions by subsidizing local depositors, for example, through public guarantees. Under some conditions, cooperative banks can perform the same function without any subsidies; however, they may be crowded out by public banks. We also discuss the influence of the political structure on the emergence of public banks in simple political-economy settings and the role of interregional mobility.

JEL-codes: F36 G21 H11 L33 (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (15)

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