The role of agency costs in financial conglomeration

Bourjade, Sylvain and Schindele, Ibolya (2011): The role of agency costs in financial conglomeration.

Abstract

This paper focuses on the role of managerial agency costs in financial conglomeration. We model conglomeration as the integration of commercial and investment banking in one organizational unit where bank managers accomplish both activities. We assume that managers differ in their abilities to undertake the individual tasks. The higher is a manager's ability in undertaking one task, the lower is her disutility of effort for that activity and the higher is her disutility of effort for the other task. When there is no managerial moral hazard, it is not optimal for the bank to form a conglomerate. We show that under managerial moral hazard, forming a conglomerate may be in the bank's interest because it may entail lower agency costs and a larger group of borrowers to fund.

• Item Type: MPRA Paper
• Language: English
• Keywords: Financial Conglomerates, Commercial Banking, Investment Banking, Banking Organization, Multi-task, Moral Hazard
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information ; Mechanism Design; G - Financial Economics > G2 - Financial Institutions and Services > G24 - Investment Banking ; Venture Capital ; Brokerage ; Ratings and Ratings Agencies; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

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