Market Discipline and Incentive Problems in Conglomerate Banks

Arnoud Boot and Anjolein Schmeits

No 1949, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper analyses 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.

Keywords: Banks; internal organization; scope (search for similar items in EconPapers)
JEL-codes: G21 G31 (search for similar items in EconPapers)
Date: 1998-08
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=1949 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
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:cpr:ceprdp:1949

Ordering information: This working paper can be ordered from
http://www.cepr.org/ ... ers/dp.php?dpno=1949

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().