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.
Bibliographical noteFunding Information:
We thank Yongmin Chen, Sung-In Jun, Yongjin Kim and an anonymous referee for helpful suggestions. We are also grateful to participants in the KAEA-Bank of Korea Joint Conferences on Growth Potential and Financial Reform in Korea. This work was supported by the National Research Foundation of Korea Grant funded by the Korean Government (grant no. NRF-2014S1A5A2A01010660 ).
© 2015 Elsevier B.V. All rights reserved.
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