A Theoretical Comparison of Banking Structures
18 Pages Posted: 20 Dec 2014
Date Written: December 19, 2014
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: Suggested Citation