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http://ssrn.com/abstract=2145822
 
 

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Banking and Trading


Arnoud W. A. Boot


University of Amsterdam - Amsterdam Business School; Centre for Economic Policy Research (CEPR); Tinbergen Institute

Lev Ratnovski


International Monetary Fund

September 13, 2012

Amsterdam Law School Research Paper No. 2012-85
Amsterdam Center for Law & Economics Working Paper No. 2012-08

Abstract:     
We study the effects of a bank’s engagement in trading. Traditional banking is relationship-based: not scalable, long-term oriented, with high implicit capital, and low risk (thanks to the law of large numbers). Trading is transactions-based: scalable, short-term, capital constrained, and with the ability to generate risk from concentrated positions. When a bank engages in trading, it can use its ‘spare’ capital to profitably expand the scale of trading. However there are two inefficiencies. A bank may allocate too much capital to trading ex-post, compromising the incentives to build relationships ex-ante. And a bank may use trading for risk-shifting. Financial development augments the scalability of trading, which initially benefits conglomeration, but beyond some point inefficiencies dominate. The deepening of financial markets in recent decades leads trading in banks to become increasingly risky, so that problems in managing and regulating trading in banks will persist for the foreseeable future. The analysis has implications for capital regulation, subsidiarization, and scope and scale restrictions in banking.

Number of Pages in PDF File: 47

Keywords: banking, trading, capital regulation, scale, subsidiarization

JEL Classification: G21, G32

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Date posted: September 24, 2012 ; Last revised: May 6, 2013

Suggested Citation

Boot, Arnoud W. A. and Ratnovski, Lev, Banking and Trading (September 13, 2012). Amsterdam Law School Research Paper No. 2012-85; Amsterdam Center for Law & Economics Working Paper No. 2012-08. Available at SSRN: http://ssrn.com/abstract=2145822 or http://dx.doi.org/10.2139/ssrn.2145822

Contact Information

Arnoud W. A. Boot (Contact Author)
University of Amsterdam - Amsterdam Business School ( email )
Roetersstraat 11
Amsterdam, 1018 WB
Netherlands
+31 20 525 4162 (Phone)
+31 20 525 5318 (Fax)
Centre for Economic Policy Research (CEPR) ( email )
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Tinbergen Institute ( email )
Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands
Lev Ratnovski
International Monetary Fund ( email )
700 19th St NW
Washington, DC 20431
United States
+1 202 623 8213 (Phone)
HOME PAGE: http://ratnovski.googlepages.com
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