The Invisible Hand and the Banking Trade: Seigniorage, Risk-shifting and More

Marcus Miller and Lei Zhang
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Lei Zhang: University of Warwick

CAGE Online Working Paper Series from Competitive Advantage in the Global Economy (CAGE)

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 ncorporate franchise values due to market power; and risk-taking by banks with limited liability.We go further to show how the capacity of franchis evalues to mitigate risk taking maybe 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.

Keywords: Money and banking; Seigniorage; Risk-taking; Bailouts; Regulation (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-ban, nep-cfn and nep-cta
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http://www2.warwick.ac.uk/fac/soc/economics/resear ... tions/135-miller.pdf

Related works:
Journal Article: THE INVISIBLE HAND AND THE BANKING TRADE: SEIGNIORAGE, RISK-SHIFTING, AND MORE (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:cge:wacage:135

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