Universal banking, competition and risk in a macro model
Tatiana Damjanovic,
Vladislav Damjanovic and
Charles Nolan
No 2012-19, SIRE Discussion Papers from Scottish Institute for Research in Economics (SIRE)
Abstract:
A stylized macroeconomic model is developed with an indebted, heterogeneous Investment Banking Sector funded by borrowing from a retail banking sector. The government guarantees retail deposits. Investment banks choose how risky their activities should be. We compared the benefits of separated vs. universal banking modelled as a vertical integration of the retail and investment banks. The incidence of banking default is considered under different constellations of shocks and degrees of competitiveness. The benefits of universal banking rise in the volatility of idiosyncratic shocks to trading strategies and are positive even for very bad common shocks, even though government bailouts, which are costly, are larger compared to the case of separated banking entities. The welfare assessment of the structure of banks may depend crucially on the kinds of shock hitting the economy as well as on the efficiency of government intervention.
Keywords: Risk in DSGE models; investment banking; financial intermediation; separating commercial and investment banking; competition and risk; moral hazard in banking; prudential regulation; systematic vs. idiosyncratic risks. (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge and nep-mac
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Citations: View citations in EconPapers (2)
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Working Paper: Universal banking, competition and risk in a macro model (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:edn:sirdps:322
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