Banking and Trading

Arnoud Boot and Lev Ratnovski ()

Review of Finance, 2016, vol. 20, issue 6, 2219-2246

Abstract: We study the interaction between relationship banking and short-term arm’s length activities of banks, called trading. We show that a bank can use the franchise value of its relationships to expand the scale of trading, but may allocate too much capital to trading ex post, compromising its ability to build relationships ex ante. This effect is reinforced when trading is used for risk shifting. Overall, combining relationship banking and trading offers benefits under small-scale trading, but distortions may dominate when trading is unbridled. This suggests that trading by banks, while benign historically, might be distortive with deeper financial markets.

JEL-codes: G21 G24 G28 G32 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (52)

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Related works:
Working Paper: Banking and Trading (2012)
Working Paper: Banking and Trading (2012)
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