Banking and Trading

By Arnoud Boot, Lev Ratnovski. Social Science Research Network, 2012

138 citations recorded by the source corpus.

We study the effects of a bank’s engagement in trading. Traditional banking is relationship-based: not scalable, long-term oriented, with high implicit capital, and low risk (thanks to the law of large numbers). Trading is transactions-based: scalable, short-term, capital constrained, and with the ability to generate risk from concentrated positions. When a bank engages in trading, it can use its ‘spare’ capital to profitably expand the scale of trading. However there are two inefficiencies. A bank may allocate too much capital to trading ex-post, compromising the incentives to build relationships ex-ante. And a bank may use trading for risk-shifting. Financial development augments the scalability of trading, which initially benefits conglomeration, but beyond some point inefficiencies dominate. The deepening of financial markets in recent decades leads trading in banks to become increasingly risky, so that problems in managing and regulating trading in banks will persist for the foreseeable future. The analysis has implications for capital regulation, subsidiarization, and scope and scale restrictions in banking.

Subfields: Accounting, Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/d18e37e010c96e04db211f9920f56b15111c392b

Citations in the corpus

• Shadow Banking: Economics and Policy (2012, unknown): “More generally, dealer banks can have incentives and abilities to increase risks in more extreme ways than commercial banks do (it is easier to take tail risks with tradable assets that can generate highly skewed payoffs; see Boot, 2011; and Boot and Ratnovski, 2012).”
• Banking Business Models Monitor 2015 Europe (2016, unknown): “See Admati & Hellwig (2013), Blundell-Wignall & Roulet (2013), Boot & Ratnovski (2012), and Gehrig (2015).”