A Rationale for the Functional Separation of Qualitative Asset Transformation Services in Banking

Posted: 19 Apr 1998

See all articles by Stephen R. Peters

Stephen R. Peters

Kansas State University - Department of Finance

Anjan V. Thakor

Washington University, Saint Louis - John M. Olin School of Business; European Corporate Governance Institute (ECGI)

Date Written: March 1995

Abstract

This paper explores the link between the asset transformation services provided by a bank and the manner in which these assets are optimally funded. This link arises from the fact that asset transformation is distorted by various forms of moral hazard and the resolution of moral hazard is predicated on the type of liability instrument that is used to fund the bank. The demand deposit contract is unable to resolve both types of moral hazards that are modeled. Partial deposit insurance can increase the efficiency of the demand deposit contract but it too fails to provide a complete attenuation of both forms of moral hazard. Efficiency can be enhanced further by functionally separating the various asset transformation services of the bank, suggesting a variant of the "narrow bank" proposal currently being debated.

JEL Classification: D82, G28, G21

Suggested Citation

Peters, Stephen R. and Thakor, Anjan V., A Rationale for the Functional Separation of Qualitative Asset Transformation Services in Banking (March 1995). Available at SSRN: https://ssrn.com/abstract=7416

Stephen R. Peters (Contact Author)

Kansas State University - Department of Finance ( email )

Manhattan, KS 66506
United States

Anjan V. Thakor

Washington University, Saint Louis - John M. Olin School of Business ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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