Financial Contracting, Reorganization and Mixed Finance: A Theory of Universal Banking
Posted: 23 Aug 1998
Focusing on the combination of commercial and investment banking inherent in universal financial intermediation, optimal transfer of control, modes of corporate governance and the structure of particular banking systems are developed in a two-stage game about investment in managerial resources by banks, financial contracting and optimal restructuring of companies. Particular banking systems are interpreted as subgame-perfect equilibria of the overall game. It is shown that universal banking results in renegotiation-proof optimal mixed finance (combined debt-equity) contracts with reorganization and investment in organizational capital which leads to German style financial intermediation. Specialized banking admits optimal contracts only in the case of separate but simultaneous debt and equity finance (joint contracts) and with non-duplication of investment in restructuring capabilities. Finally, universal financial intermediation is related to main-banking and some principles for reforming banking systems of economies in transition are presented.
JEL Classification: G21, G24, G32, G33
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