On the Effects of Banks' Equity Ownership on Credit Markets: An Antitrust Perspective on the Glass-Steagall Act

CORE Discussion Paper No. 2004/38

20 Pages Posted: 3 Mar 2007

See all articles by Rabah Amir

Rabah Amir

University of Arizona - Department of Economics; University of Arizona

Michael Troege

ESCP-Europe

Date Written: June 2004

Abstract

Recent U.S. legislation (Gramm-Leach-Bliley Act) allows commercial banks to enter merchant banking, i.e. hold equity in non-financial firms. A stylised auction-theoretic model is developed to investigate the effects of bank equity stakes in firms on the competition in bank loans. The main finding is that the largest stake confers a competitive advantage to the holding bank and constitutes a barrier to entry in equity acquisition, resulting in high interest rates charged to firms. This finding unearths an antitrust dimension in the controversial debate on the separation of banking and commerce in the U.S., and provides a theoretical basis for recent empirical evidence on the relationship between bank equity holdings and the cost of debt finance in Germany and Japan.

Keywords: banking and commerce, regulation and antitrust, Glass-Steagall act, Gramm-Leach-Bliley act, auctions

JEL Classification: G21, D44, L40

Suggested Citation

Amir, Rabah and Troege, Michael, On the Effects of Banks' Equity Ownership on Credit Markets: An Antitrust Perspective on the Glass-Steagall Act (June 2004). Available at SSRN: https://ssrn.com/abstract=967613 or http://dx.doi.org/10.2139/ssrn.967613

Rabah Amir (Contact Author)

University of Arizona - Department of Economics ( email )

Tucson, AZ 85721
United States

University of Arizona ( email )

Department of History
Tucson, AZ 85721
United States

Michael Troege

ESCP-Europe ( email )

79, Avenue de Republique
75543 Paris, Cedex 11, 75011
France
33/149232601 (Phone)

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