A Theoretical Comparison of Banking Structures

18 Pages Posted: 20 Dec 2014

See all articles by Ka Kei Chan

Ka Kei Chan

Brunel University London

Alistair Milne

Loughborough University - School of Business and Economics

Date Written: December 19, 2014

Abstract

The objective of this paper is to compare, based on a theoretical framework, the value created in different banking structures. We construct a simple model to characterise a banking group that consists two different subsidiary banks. The model distinguishes safe utility subsidiary bank from riskier casino subsidiary bank. Under these model specifications, three types of banking structures: (1) total separation, (2) ring fencing, and (3) universal banking are studied. Our proposed model shows that total separation is always a suboptimal banking structure to both the banking group and the economy as a whole, while the comparison between ring fencing or universal banking depends on the expected returns to the subsidiary banks.

Keywords: Bank Structure, Bank Regulation, Ring Fencing, Systemic Crisis

JEL Classification: G21, G38, G01

Suggested Citation

Chan, Ka Kei and Milne, Alistair K. L., A Theoretical Comparison of Banking Structures (December 19, 2014). Available at SSRN: https://ssrn.com/abstract=2540606 or http://dx.doi.org/10.2139/ssrn.2540606

Ka Kei Chan (Contact Author)

Brunel University London ( email )

Kingston Lane
Uxbridge, Middlesex UB8 3PH
United Kingdom

Alistair K. L. Milne

Loughborough University - School of Business and Economics ( email )

Epinal Way
Loughborough
Leicestershire, LE11 3TU
United Kingdom

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