Intermediation and vertical integration

Mitchell Berlin and Loretta Mester

No 97-17, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: This paper views financial intermediaries as vertically integrated firms. The authors explore how competitive conditions in retail and wholesale funding markets affect the incentive for (upstream) originators and (downstream) fund managers to integrate. The underlying tradeoff in our model is driven by the choice between the production of an illiquid but high yielding loan and a liquid but relatively low yielding bond. The authors find that greater homogeneity among savers has two effects, both of which tend to increase the incentive to form integrated intermediaries. Greater homogeneity both increases competition between independent fund managers and reduces the likelihood of inefficient underinvestment by integrated intermediaries. The authors also find that the incentive to integrate is greater when fund managers have more power in the market for firms' securities.

Keywords: Bank competition; Bank loans; Financial institutions (search for similar items in EconPapers)
Date: 1997
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Related works:
Journal Article: Intermediation and vertical integration (1998)
Journal Article: Intermediation and Vertical Integration (1998)
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