Organization Structure and Credibility: Evidence from Commercial Bank Securities Activities before the Glass-Steagall Act

45 Pages Posted: 7 Dec 1997  

Randall S. Kroszner

Booth School of Business, University of Chicago; National Bureau of Economic Research (NBER)

Raghuram G. Rajan

University of Chicago - Booth School of Business; International Monetary Fund (IMF); National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: March 1997

Abstract

We examine the two ways in which U.S. commercial banks organized their investment banking operations before the 1933 Glass-Steagall Act forced the banks to leave the securities
business: as an internal securities department within the bank and as a separately incorporated affiliate with its own board of directors. While departments underwrote seemingly higher
quality firms and securities than did comparable affiliates, the departments obtained lower prices for the issues they underwrote. The higher risk premium associated with the internal department is consistent with investors discounting for the greater likelihood of conflicts of interest when lending and underwriting are within the same structure. As a result, commercial banks evolved toward choosing the separate affiliate structure. Our results suggest that internal structure is an effective commitment mechanism, and absent other distortions, market pressures would propel banks to adopt an internal structure that would address regulators' concerns about conflicts of interest.

JEL Classification: G21, G24, L22, N22

Suggested Citation

Kroszner, Randall S. and Rajan, Raghuram G., Organization Structure and Credibility: Evidence from Commercial Bank Securities Activities before the Glass-Steagall Act (March 1997). Available at SSRN: https://ssrn.com/abstract=45322 or http://dx.doi.org/10.2139/ssrn.45322

Randall S. Kroszner (Contact Author)

Booth School of Business, University of Chicago ( email )

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HOME PAGE: http://gsbwww.uchicago.edu/fac/randall.kroszner/re

National Bureau of Economic Research (NBER)

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Raghuram G. Rajan

University of Chicago - Booth School of Business ( email )

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United States
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773-702-0458 (Fax)

International Monetary Fund (IMF) ( email )

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National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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773-702-0458 (Fax)

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