Moral hazard under commercial and universal banking

John H. Boyd, Chun Chang, Bruce D. Smith

Research output: Contribution to journalArticlepeer-review

97 Scopus citations

Abstract

Many claims have been made about the potential benefits and the potential costs of adopting a system of universal banking in the United States. We evaluate these claims using a model where there is a moral hazard problem between banks and "borrowers," a moral hazard problem between banks and a deposit insurer, and a costly state verification problem. Under conditions we describe, allowing banks to take equity positions in firms strengthens their ability to extract surplus, and exacerbates problems of moral hazard. The incentives of universal banks to take equity positions will often be strongest when these problems are most severe.

Original languageEnglish (US)
Pages (from-to)420-468
Number of pages49
JournalJournal of Money, Credit and Banking
Volume30
Issue number3
DOIs
StatePublished - Aug 1998

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