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Banking and Trading

descriptionPublicationkeyboard_double_arrow_right Article , Research , Other literature type , Preprint , Report 01 Jan 2012 Netherlands Publisher:Oxford University Press (OUP)Journal:Review of Finance, volume 20, pages 2,219-2,246 (issn: 1572-3097, eissn: 1573-692X,

Authors: Arnoud W. A. Boot; Arnoud W. A. Boot; Arnoud W. A. Boot; Lev Ratnovski; Lev Ratnovski;

doi: 10.1093/rof/rfv069 , 10.2139/ssrn.2145822 , 10.2139/ssrn.2142161 , 10.5089/9781475511215.001

handle: 11245/1.515134 , 11245/1.406736 , 10419/87224

Banking and Trading

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Abstract

We study the interaction between relationship banking and short-term arm’s length activities of banks, called trading. We show that a bank can use the franchise value of its relationships to expand the scale of trading, but may allocate too much capital to trading ex post , compromising its ability to build relationships ex ante . This effect is reinforced when trading is used for risk shifting. Overall, combining relationship banking and trading offers benefits under small-scale trading, but distortions may dominate when trading is unbridled. This suggests that trading by banks, while benign historically, might be distortive with deeper financial markets.

Country

Netherlands

Related Organizations

Universiteit van Amsterdam
UNIVERSITEIT VAN AMSTERDAM
Netherlands
University of Amsterdam
Netherlands
Economic Policy Institute
United States
Faculty of Economics and Business
Indonesia

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Keywords

G28, 330, banking; capital regulation; scale restrictions; trading, G24, Venture Capital, Capital;Banking;Bank regulations;Commercial banks;Resource allocation;Investment;Bank regulation, proprietary trading, relationship banking, Volcker rule, moral hazard, financial markets, bank profits, bank profitability, Government Policy and Regulation,, Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; Investment Banking; Venture Capital; Brokerage; Ratings and Ratings Agencies; Government Policy and Regulation, Aktionäre, Banks, Bankgeschäft, Depository Institutions, Ratings and Ratings Agencies, Ökonomischer Anreiz, ddc:330, Micro Finance Institutions, Brokerage, Zeitkonsistenz, Mortgages, Investment Banking, G21, Government Policy and Regulation, Spekulation, Theorie, jel: jel:G24, jel: jel:G21, jel: jel:G28, jel: jel:G32

Impact byBIP!

	citations This is an alternative to the "Influence" indicator, which also reflects the overall/total impact of an article in the research community at large, based on the underlying citation network (diachronically).	101
	popularity This indicator reflects the "current" impact/attention (the "hype") of an article in the research community at large, based on the underlying citation network.	Top 10%
	influence This indicator reflects the overall/total impact of an article in the research community at large, based on the underlying citation network (diachronically).	Top 10%
	impulse This indicator reflects the initial momentum of an article directly after its publication, based on the underlying citation network.	Top 1%