Banks as Producers of Financial Services

41 Pages Posted: 12 Jan 2019

See all articles by Wilbur John Coleman

Wilbur John Coleman

Duke University, Fuqua School of Business-Economics Group

Christian T. Lundblad

University of North Carolina Kenan-Flagler Business School

Date Written: December 30, 2018

Abstract

This paper documents that a rise in government debt is associated with a fall in shadow banking and a rise in traditional banking. This is explained in a model where banks are valued for the financial services they offer. Government debt does not compete directly with banks in providing financial services, but the demand for government debt by banks imparts a liquidity premium to government debt. A rise in government debt is estimated to disproportionately benefit traditional banks so they expand at the expense of shadow banks. An optimal debt policy leads both types of banks to become default free.

Keywords: Banking, Shadow Banking, Liquidity Premium, Optimal Debt Policy

Suggested Citation

Coleman, Wilbur John and Lundblad, Christian T., Banks as Producers of Financial Services (December 30, 2018). Available at SSRN: https://ssrn.com/abstract=3309317 or http://dx.doi.org/10.2139/ssrn.3309317

Wilbur John Coleman

Duke University, Fuqua School of Business-Economics Group ( email )

Box 90097
Durham, NC 27708-0097
United States
(919) 660-7962 (Phone)
(919) 660-7971 (Fax)

Christian T. Lundblad (Contact Author)

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States
919-962-8441 (Phone)

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