Moral Hazard Under Commercial and Universal Banking

Posted: 6 Apr 1998

See all articles by John H. Boyd

John H. Boyd

University of Minnesota - Twin Cities - Carlson School of Management

Chun Chang

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF)

Bruce D. Smith

University of Texas at Austin (Deceased)

Abstract

Many claims have been made about the potential benefits, and the potential costs, of adopting a system of universal banking in the United States. We evaluate these claims using a model where there is a moral hazard problem between banks and "borrowers," a moral hazard problem between banks and a deposit insurer, and a costly state verification problem. Under conditions we describe, allowing banks to take equity positions in firms strengthens their ability to extract surplus, and exacerbates problems of moral hazard. The incentives of universal banks to take equity positions will often be strongest when these problems are most severe.

JEL Classification: D82, G21

Suggested Citation

Boyd, John H. and Chang, Chun and Smith, Bruce D., Moral Hazard Under Commercial and Universal Banking. Journal of Money, Credit and Banking, Vol. 30, No. 3, Part 2, August 1998, Available at SSRN: https://ssrn.com/abstract=74068

John H. Boyd

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States
612-624-1834 (Phone)

Chun Chang (Contact Author)

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

Bruce D. Smith

University of Texas at Austin (Deceased)

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