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Title:On the coexistence of banks and markets PDF Logo
Authors:Gersbach, Hans
Uhlig, Harald
Issue Date:2006
Series/Report no.:SFB 649 discussion paper 2006,054
Abstract:We examine the coexistence of banks and financial markets, studying a credit market where the qualities of investment projects are not observable and the investment decisions of entrepreneurs are not contractible. Standard banks can alleviate moral-hazard problems by securing a portion of a repayment in the case of non-investment. Financial markets operated by investment banks and rating agencies have screening know-how and can alleviate adverse-selection problems. In competition, standard banks are forced to increase repayments, since financial markets can attract the highest-quality borrowers. This, in turn, increases the share of shirkers and may make lending unprofitable for standard banks. The coexistence of financial markets and standard banks is socially inefficient. The same inefficiency can happen with the entrance of sophisticated banks, operating with a combination of rating and ongoing monitoring technologies.
JEL:G24
G28
G32
G38
D80
D92
D43
Document Type:Working Paper
Appears in Collections:SFB 649 Discussion Papers, HU Berlin

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