Borrower's moral hazard, risk premium, and welfare: a comparison of universal and stand-alone banking systems
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...
| Main Authors: | , |
|---|---|
| Format: | Article |
| Published: |
Elsevier
2015
|
| Subjects: | |
| Online Access: | https://eprints.nottingham.ac.uk/39089/ |
| _version_ | 1848795760970170368 |
|---|---|
| author | Banerji, Sanjay Basu, Parantap |
| author_facet | Banerji, Sanjay Basu, Parantap |
| author_sort | Banerji, Sanjay |
| building | Nottingham Research Data Repository |
| collection | Online Access |
| description | 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. |
| first_indexed | 2025-11-14T19:37:13Z |
| format | Article |
| id | nottingham-39089 |
| institution | University of Nottingham Malaysia Campus |
| institution_category | Local University |
| last_indexed | 2025-11-14T19:37:13Z |
| publishDate | 2015 |
| publisher | Elsevier |
| recordtype | eprints |
| repository_type | Digital Repository |
| spelling | nottingham-390892020-05-04T17:02:06Z https://eprints.nottingham.ac.uk/39089/ Borrower's moral hazard, risk premium, and welfare: a comparison of universal and stand-alone banking systems Banerji, Sanjay Basu, Parantap 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. Elsevier 2015-02-24 Article PeerReviewed Banerji, Sanjay and Basu, Parantap (2015) Borrower's moral hazard, risk premium, and welfare: a comparison of universal and stand-alone banking systems. Journal of Economic Asymmetries, 12 (1). pp. 61-72. ISSN 1703-4949 Moral hazard; Information friction; Risk premium http://www.sciencedirect.com/science/article/pii/S1703494915000043 doi:10.1016/j.jeca.2015.01.003 doi:10.1016/j.jeca.2015.01.003 |
| spellingShingle | Moral hazard; Information friction; Risk premium Banerji, Sanjay Basu, Parantap Borrower's moral hazard, risk premium, and welfare: a comparison of universal and stand-alone banking systems |
| title | Borrower's moral hazard, risk premium, and welfare: a comparison of universal and stand-alone banking systems |
| title_full | Borrower's moral hazard, risk premium, and welfare: a comparison of universal and stand-alone banking systems |
| title_fullStr | Borrower's moral hazard, risk premium, and welfare: a comparison of universal and stand-alone banking systems |
| title_full_unstemmed | Borrower's moral hazard, risk premium, and welfare: a comparison of universal and stand-alone banking systems |
| title_short | Borrower's moral hazard, risk premium, and welfare: a comparison of universal and stand-alone banking systems |
| title_sort | borrower's moral hazard, risk premium, and welfare: a comparison of universal and stand-alone banking systems |
| topic | Moral hazard; Information friction; Risk premium |
| url | https://eprints.nottingham.ac.uk/39089/ https://eprints.nottingham.ac.uk/39089/ https://eprints.nottingham.ac.uk/39089/ |