Default, Bailouts and the Vertical Structure of Financial Intermediaries

Tatiana Damjanovic (), Vladislav Damjanovic () and Charles Nolan ()

No 2019_04, Working Papers from Durham University Business School

Abstract: Should we break up banks and limit bailouts? We study vertical integration of deposit-taking institutions and those investing in risky equity. Integration, by eliminating a credit spread, increases output but entails larger, more frequent bailouts. Bailouts of leveraged institutions boost economic activity but are costly. The optimal structure of intermediaries depends largely on the efficiency of government intervention, the competitiveness of the Önancial sector and shocks hitting the economy. Separated institutions are preferred when profit margins are small, financial shocks systemic and volatile, and bailouts costly. For a baseline calibration, universal banks are typically preferred.

Keywords: Financial intermediation in DSGE 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)
New Economics Papers: this item is included in nep-ban and nep-mac
Date: 2019-05
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