Market Discipline in Conglomerate Banks: Is an Internal Allocation of Cost of Capital Necessary as Incentive Device?

96-39

34 Pages Posted: 17 Dec 1996

See all articles by Anjolein Schmeits

Anjolein Schmeits

New York University (NYU) - Leonard N. Stern School of Business; New York University (NYU) - Department of Finance

Arnoud W. A. Boot

University of Amsterdam - Amsterdam Business School; Centre for Economic Policy Research (CEPR); Tinbergen Institute

Date Written: October 1996

Abstract

This paper analyzes the optimal conglomeration of bank activities. We show that incentive problems in banking sometimes dictate integration of activities, but with perfect market discipline always push us away from integration/conglomeration. Ineffective market discipline could make conglomeration optimal, even if conglomeration further undermines market discipline. We also show that an internal allocation of the cost of capital could add effective `internal' discipline and improve on the outcome of conglomeration. The analysis is subsequently applied to the Barings debacle.

JEL Classification: D81

Suggested Citation

Schmeits, Anjolein B. and Boot, Arnoud W. A., Market Discipline in Conglomerate Banks: Is an Internal Allocation of Cost of Capital Necessary as Incentive Device? (October 1996). 96-39, Available at SSRN: https://ssrn.com/abstract=914 or http://dx.doi.org/10.2139/ssrn.914

Anjolein B. Schmeits (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business ( email )

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Arnoud W. A. Boot

University of Amsterdam - Amsterdam Business School ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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