Working Paper: CEPR ID: DP7051
Authors: Gyngyi Lrnth; Alan Morrison
Abstract: This paper analyzes the consequences of bank diversification into fee-based businesses. Universal banks raise welfare by expanding the range of services available to entrepreneurs. However, because they may choose to rescue failed entrepreneurs in order to sell them fee-based financial services, universal banks provide weaker incentives. Adopting a holding company structure and devolving liquidation decisions to the lending division partially resolves this problem. We demonstrate a relationship between the welfare effects of diversification and competition for fee-based business, and we analyze the tying of lending and fee-based business. Our analysis yields several testable implications.
Keywords: Bank Diversification; Soft Budget Constraint; Tying; Universal Banks
JEL Codes: G20; G21; G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| universal banks (G21) | social welfare (I38) |
| universal banks (G21) | weaker incentives for entrepreneurs (L26) |
| universal banks (G21) | rescue unsuccessful entrepreneurs (L26) |
| rescue unsuccessful entrepreneurs (L26) | weaker incentives for entrepreneurs (L26) |
| adopting diversified holding company structure (L22) | stronger incentives for entrepreneurs (L26) |
| competition in fee-based business (L11) | welfare effects of diversification (D69) |
| tying lending and fee-based services (G21) | inefficiencies (D61) |