DP7051 Bank Diversification and Incentives
|Author(s):||Gyöngyi Lóránth, Alan Morrison|
|Publication Date:||November 2008|
|Keyword(s):||Bank diversification, soft budget constraint, tying, universal banks|
|JEL(s):||G20, G21, G34|
|Programme Areas:||Financial Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=7051|
This paper analyzes the consequences of bank diversification into fee-based businesses. Universal banks raise welfare by expanding the range of services available to entrepreneurs. However, because they may choose to rescue failed entrepreneurs in order to sell them fee-based financial services, universal banks provide weaker incentives. Adopting a holding company structure and devolving liquidation decisions to the lending division partially resolves this problem. We demonstrate a relationship between the welfare effects of diversification and competition for fee-based business, and we analyze the tying of lending and fee-based business. Our analysis yields several testable implications.