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Default, bailouts and the vertical structure of financial intermediaries

Damjanovic, Tatiana; Damjanovic, Vladislav; Nolan, Charles

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Authors

Charles Nolan



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.

Citation

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

Journal Article Type Article
Acceptance Date Apr 3, 2020
Online Publication Date Apr 9, 2020
Publication Date Oct 1, 2020
Deposit Date Apr 13, 2020
Publicly Available Date Oct 9, 2021
Journal Review of Economic Dynamics
Print ISSN 1094-2025
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 38
Pages 154-180
DOI https://doi.org/10.1016/j.red.2020.04.002
Public URL https://durham-repository.worktribe.com/output/1273418

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