Deposit insurance and specialization in commercial bank lending

James R. Booth, Lena Booth

    Research output: Contribution to journalArticle

    2 Citations (Scopus)

    Abstract

    Recent literature focuses on liquidity provision as a unique service provided by financial intermediaries. In this paper, we address why commercial banks dominate the provision of these services. Liquidity provision in lending is reflected in offering loan commitments. We argue that commercial banks have a unique advantage in providing this form of liquidity. This unique advantage derives from their access to deposit insurance, and perhaps to a lesser degree, their access to the discount window of the Federal Reserve System. We empirically examine business loans offered by commercial banks, investment banks, and insurance companies. We show that commercial banks have a comparative advantage in offering loan commitments with fixed-formula floating interest rates. Other major financial intermediaries such as investment banks favor bridge loans for corporate restructuring, and insurance companies favor longer term fixed interest rate spot loans. These results are consistent with commercial banks' unique corporate lending role (that of liquidity provision) deriving from their access to fixed-price deposit insurance.

    Original languageEnglish (US)
    Pages (from-to)165-177
    Number of pages13
    JournalReview of Financial Economics
    Volume13
    Issue number1-2
    DOIs
    StatePublished - 2004

    Fingerprint

    Commercial banks
    Bank lending
    Deposit insurance
    Loans
    Liquidity provision
    Lending
    Interest rates
    Financial intermediaries
    Loan commitments
    Investment banks
    Insurance companies
    Fixed price
    Discount window
    Liquidity
    Comparative advantage
    Federal Reserve
    Floating
    Corporate restructuring

    Keywords

    • Commercial bank lending
    • Deposit insurance
    • Loan characteristics
    • Loan commitments

    ASJC Scopus subject areas

    • Economics and Econometrics
    • Finance

    Cite this

    Deposit insurance and specialization in commercial bank lending. / Booth, James R.; Booth, Lena.

    In: Review of Financial Economics, Vol. 13, No. 1-2, 2004, p. 165-177.

    Research output: Contribution to journalArticle

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