Past Events

Seminar - Universal banking and risk premium in financial markets

After the great depression in the United States, the Glass-Steagall Act of 1933 imposed a separation between investment banking and commercial banking activities.  The former primarily deals with the business of underwriting securities while the latter engages in the business of taking deposits and making loans.

Thus, financial intermediaries could not participate simultaneously in both equity and loan markets. A series of financial reforms in the US, beginning in the late eighties and culminating in the Gramm-Leach-Bliley Act of 1999 put an end to this separation between commercial banking and investment banking, leading to universal banking.  In light of the current debate about the financial crisis, a natural question arises whether this universal banking heightened the risk in the financial markets emanating from moral hazard of borrowers? 

Using an intertemporal model, we argue that universal banking could give rise to a greater risk sharing arrangement if financial contracts are properly written.  This could lower the equity risk premium attributed to informational asymmetry among lenders and borrowers.

Speaker: Professor Parantap Basu, School of Economics, Finance and Business, Durham University

Contact brett.cherry@durham.ac.uk for more information about this event.

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