Default, Bailouts and the Vertical Structure of Financial Intermediaries

Tatiana Damjanovic (), Vladislav Damjanovic and Charles Nolan

Review of Economic Dynamics, 2020, vol. 38, 154-180

Abstract: Should we break up banks and limit bailouts? We study vertical integration of deposit-taking institutions with those investing in risky equity. Integration eliminates a credit spread, reducing aggregate banking sector profitability; so while integration increases output it also entails larger, more frequent bailouts of retail customers. Bailouts boost economic activity but are costly. The optimal structure of banking depends on the efficiency of government intervention, the competitiveness of the banking sectors and shocks. Separated institutions are preferred when government bailouts are costly. Optimal bank regulation tolerates profits at investment and universal banks to limit bailouts, but imposes strict antitrust on retail banks. (Copyright: Elsevier)

Keywords: Financial intermediation in macro models; Vertical structure of financial intermediary; Separation of retail and investment banks; Bailouts; Trade-off between financial stability and efficiency (search for similar items in EconPapers)
JEL-codes: E13 E44 G11 G24 G28 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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DOI: 10.1016/j.red.2020.04.002

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