Monitoring, cross subsidies, and universal banking

Jay Pil Choi, Christodoulos Stefanadis

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

We formalize the idea that a financial conglomerate may utilize commercial banking activities to cross-subsidize investment banking through bundled offers. The investment banking sector entails supra-normal profits due to incentive problems with security underwriting. Universal banks may aim to capture (some of) those profits by providing discounts on commercial loans. This practice has an adverse effect on commercial banks' monitoring incentives, encouraging the pursuit of private rents by entrepreneurs. It also leads to lower underwriting fees and a lower probability of successful public offerings. The social welfare effects of universal banking can be either positive or negative.

Original languageEnglish
Pages (from-to)48-55
Number of pages8
JournalInternational Journal of Industrial Organization
Volume43
DOIs
Publication statusPublished - 2015 Nov 1

All Science Journal Classification (ASJC) codes

  • Industrial relations
  • Aerospace Engineering
  • Economics and Econometrics
  • Economics, Econometrics and Finance (miscellaneous)
  • Strategy and Management
  • Industrial and Manufacturing Engineering

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