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When bigger isn’t better : bailouts and bank behaviour

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Miller, Marcus, Zhang, Lei and Li, Han Hao (2011) When bigger isn’t better : bailouts and bank behaviour. Working Paper. Coventry, UK: Department of Economics, University of Warwick. CAGE Online Working Paper Series, Volume 2011 (Number 66).

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Abstract

Lending retail deposits to SMEs and household borrowers may be the traditional role of
commercial banks: but banking in Britain has been transformed by increasing consolidation
and by the lure of high returns available from wholesale Investment activities. With
appropriate changes to the baseline model of commercial banking in Allen and Gale (2007),
we show how market power enables banks to collect „seigniorage‟; and how „tail risk‟
investment allows losses to be shifted onto the taxpayer.
In principle, the high franchise values associated with market power assist regulatory capital
requirements to check risk-taking. But when big banks act strategically, bailout expectations
can undermine these disciplining devices: and the taxpayer ends up „on the hook‟- as in the
recent crisis. That structural change is needed to prevent a repeat seems clear from the
Vickers report, which proposes to protect the taxpayer by a „ring fence‟separating
commercial and investment banking.

Item Type: Working or Discussion Paper (Working Paper)
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HC Economic History and Conditions
Divisions: Faculty of Social Sciences > Economics
Library of Congress Subject Headings (LCSH): Banks and banking -- Great Britain, Bailouts (Government policy) -- Great Britain, Economics -- Mathematical models
Series Name: CAGE Online Working Paper Series
Publisher: Department of Economics, University of Warwick
Place of Publication: Coventry, UK
Official Date: November 2011
Dates:
DateEvent
November 2011Published
Volume: Volume 2011
Number: Number 66
Number of Pages: 47
Status: Not Peer Reviewed
Publication Status: Published
Access rights to Published version: Open Access
Funder: Economic and Social Research Council (Great Britain) (ESRC)
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URI: http://wrap.warwick.ac.uk/id/eprint/57671

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