Miller, Marcus and Zhang , Lei (2013) The invisible hand and the banking trade : seigniorage, risk-shifting and more. Working Paper. Coventry, UK: Department of Economics, University of Warwick. CAGE Online Working Paper Series, Volume 2013 (Number 135).

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Abstract

The classic Diamond-Dybvig model of banking assumes perfect
competition and abstracts from issues of moral hazard, hardly appropriate
when considering modern UK banking. We therefore modify the
classic model to incorporate franchise values due to market power; and
risk-taking by banks with limited liability. We go further to show how
the capacity of franchise values to mitigate risk taking may be undermined
by the bailout option; with explicit analytical results provided
for the case of extreme risk-aversion. After a brief discussion of how
this may impact on the distribution of income, we outline the ways in
which the Vickers Report seeks to remedy these problems.

Item Type:	Working or Discussion Paper (Working Paper)
Alternative Title:
Subjects:	H Social Sciences > HB Economic Theory
Divisions:	Faculty of Social Sciences > Economics
Library of Congress Subject Headings (LCSH):	Banks and banking , Seigniorage (Finance) , Bailouts (Government policy), Financial risk
Series Name:	CAGE Online Working Paper Series
Publisher:	Department of Economics, University of Warwick
Place of Publication:	Coventry, UK
Official Date:	June 2013
Volume:	Volume 2013
Number:	Number 135
Number of Pages:	27
Status:	Not Peer Reviewed
Publication Status:	Published
Funder:	Economic and Social Research Council (Great Britain) (ESRC), University of Warwick
References:
URI:	http://wrap.warwick.ac.uk/id/eprint/59217

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