Universal Banking and Equity Risk Premium
24 Pages Posted: 5 Jul 2010
Date Written: July 4, 2010
Did the unification of commercial and investment banking heighten risk in financial markets due to moral hazard of borrowers? In a simple intertemporal model with moral hazard and uninsured risk, we argue that if financial contracts are properly written, the integration in financial markets could give rise to greater risk sharing arrangement and could eliminate the equity risk premium attributed to informational asymmetry among the lenders and the borrowers.
Keywords: Universal banking, equity risk premium
JEL Classification: G10, E50
Suggested Citation: Suggested Citation