Moral hazard under commercial and universal banking

John H. Boyd, Chun Chang and Bruce Smith

No 585, Working Papers from Federal Reserve Bank of Minneapolis

Abstract: Many claims have been made about the potential benefits, and the potential costs, of adopting a system of universal banking in the United States. We evaluate these claims using a model where there is a moral hazard problem between banks and ?borrowers,? a moral hazard problem between banks and a deposit insurer, and a costly state verification problem. Under conditions we describe, allowing banks to take equity positions in firms strengthens their ability to extract surplus, and exacerbates problems of moral hazard. The incentives of universal banks to take equity positions will often be strongest when these problems are most severe.

Keywords: Universal; banks (search for similar items in EconPapers)
Date: 1998
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Citations: View citations in EconPapers (125)

Published in Journal of Money, Credit, and Banking, Part 2 (Vol. 30, No. 3, August 1998, pp. 426-468)

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Related works:
Journal Article: Moral hazard under commercial and universal banking (1998)
Journal Article: Moral Hazard under Commercial and Universal Banking (1998)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmwp:585

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