Skip to main content

Research Repository

Advanced Search

Borrower's moral hazard, risk premium, and welfare: a comparison of universal and stand-alone banking systems

Banerji, Sanjay; Basu, Parantap

Authors

Parantap Basu



Abstract

Does the unification of retail and investment banking necessarily heighten risk in financial markets? Using a simple two period intertemporal model with borrower's moral hazard and uninsured risk, we argue that the integration in financial service markets under universal banking could give rise to a greater risk sharing arrangement. This could eliminate the stock market premium attributed to borrower's moral hazard. Absent any other frictions, we show that there is an unambiguous output and welfare gain from switching to a universal banking system from retail banking because of this efficient risk sharing. This welfare gain is higher in economies prone to greater information friction caused by borrower's moral hazard.

Journal Article Type Article
Journal Journal of Economic Asymmetries
Electronic ISSN 1703-4949
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 12
Issue 1
APA6 Citation Banerji, S., & Basu, P. (in press). Borrower's moral hazard, risk premium, and welfare: a comparison of universal and stand-alone banking systems. Journal of Economic Asymmetries, 12(1), https://doi.org/10.1016/j.jeca.2015.01.003
DOI https://doi.org/10.1016/j.jeca.2015.01.003
Keywords Moral hazard; Information friction; Risk premium
Publisher URL http://www.sciencedirect.com/science/article/pii/S1703494915000043
Copyright Statement Copyright information regarding this work can be found at the following address: http://creativecommons.org/licenses/by-nc-nd/4.0

Files

Universal_final revision__0001.pdf (764 Kb)
PDF

Copyright Statement
Copyright information regarding this work can be found at the following address: http://creativecommons.org/licenses/by-nc-nd/4.0





You might also like



Downloadable Citations

;