Discussion paper

DP7051 Bank Diversification and Incentives

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.


Morrison, A and G Lóránth (2008), ‘DP7051 Bank Diversification and Incentives‘, CEPR Discussion Paper No. 7051. CEPR Press, Paris & London. https://cepr.org/publications/dp7051