Hitotsubashi Institute for Advanced Study


Monitoring, Cross Subsidies, and Universal Banking


We formalize the idea that a financial conglomerate may utilize commercial banking activities to cross-subsidize investment banking through bundled offers. The investment banking sector entails supra-normal profits due to incentive problems with security underwriting. Universal banks may aim to capture (some of) those profits by providing discounts on commercial loans. This practice has an adverse effect on commercial banks’ monitoring incentives, encouraging the pursuit of private rents by entrepreneurs. It also leads to lower underwriting fees and a lower probability of successful public offerings. The social welfare effects of universal banking can be either positive or negative.

Report No.: HIAS-E-8
Author(s): Jay Pil Choi(a), (b)
Christodoulos Stefanadis(c)
Affiliation: (a) Department of Economics, Michigan State University, East Lansing, MI 48824, USA
(b) Hitotsubashi Institute for Advanced Study, Hitotsubashi University, 2-1, Naka, Kunitachi, Tokyo 186-8601, Japan
(c) Department of Finance, University of Piraeus, 80 Karaoli and Dimitriou, Piraeus 18534, Greece
Issued Date: August 2015
Keywords: universal banking, moral hazard, monitoring, cross subsidy, bundled offer
JEL: G21, L10