Default, bailouts and the vertical structure of financial intermediaries

Damjanovic, T., Damjanovic, V. and Nolan, C. (2020) Default, bailouts and the vertical structure of financial intermediaries. Review of Economic Dynamics, 38, pp. 154-180. (doi: 10.1016/j.red.2020.04.002)

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Abstract

Should we break up banks and limit bailouts? We study vertical integration of deposit-taking institutions with those investing in risky equity. Integration eliminates a credit spread, reducing aggregate banking sector profitability; so while integration increases output it also entails larger, more frequent bailouts of retail customers. Bailouts boost economic activity but are costly. The optimal structure of banking depends on the efficiency of government intervention, the competitiveness of the banking sectors and shocks. Separated institutions are preferred when government bailouts are costly. Optimal bank regulation tolerates profits at investment and universal banks to limit bailouts, but imposes strict antitrust on retail banks.

Item Type:Articles
Status:Published
Refereed:Yes
Glasgow Author(s) Enlighten ID:Nolan, Professor Charles and Damjanovic, Professor Tatiana and Damjanovic, Dr Vladislav
Authors: Damjanovic, T., Damjanovic, V., and Nolan, C.
College/School:College of Social Sciences > Adam Smith Business School > Economics
Journal Name:Review of Economic Dynamics
Publisher:Elsevier
ISSN:1094-2025
ISSN (Online):1096-6099
Published Online:09 April 2020
Copyright Holders:Copyright © 2020 Elsevier
First Published:First published in Review of Economic Dynamics 38: 154-180
Publisher Policy:Reproduced in accordance with the copyright policy of the publisher

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