Cookies

We use cookies to ensure that we give you the best experience on our website. By continuing to browse this repository, you give consent for essential cookies to be used. You can read more about our Privacy and Cookie Policy.


Durham Research Online
You are in:

Borrower's moral hazard, risk premium, and welfare : a comparison of universal and stand-alone banking systems.

Banerji, S. and Basu, P. (2015) 'Borrower's moral hazard, risk premium, and welfare : a comparison of universal and stand-alone banking systems.', Journal of economic asymmetries., 12 (1). pp. 61-72.

Abstract

Does the unification of retail and investment banking necessarily heighten risk in financial markets? Using a simple two period intertemporal model with borrower's moral hazard and uninsured risk, we argue that the integration in financial service markets under universal banking could give rise to a greater risk sharing arrangement. This could eliminate the stock market premium attributed to borrower's moral hazard. Absent any other frictions, we show that there is an unambiguous output and welfare gain from switching to a universal banking system from retail banking because of this efficient risk sharing. This welfare gain is higher in economies prone to greater information friction caused by borrower's moral hazard.

Item Type:Article
Keywords:Moral hazard, Information friction, Risk premium.
Full text:(AM) Accepted Manuscript
Download PDF
(187Kb)
Status:Peer-reviewed
Publisher Web site:http://dx.doi.org/10.1016/j.jeca.2015.01.003
Publisher statement:NOTICE: this is the author’s version of a work that was accepted for publication in The Journal of Economic Asymmetries. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in The Journal of Economic Asymmetries, 12, 1, June 2015, 10.1016/j.jeca.2015.01.003.
Record Created:16 Feb 2015 14:35
Last Modified:28 Aug 2016 00:39

Social bookmarking: del.icio.usConnoteaBibSonomyCiteULikeFacebookTwitterExport: EndNote, Zotero | BibTex
Look up in GoogleScholar | Find in a UK Library