Abstract
Over the last decade, there has been considerable public debate in the U.S. on the need to maintain legal barriers (firewalls) between commercial and non-traditional banking. However, no theoretical model has yet been developed that examines the joint influence of various factors suggested, such as competition, production economies and regulatory subsidies that affect the bank's incentive to undertake non-traditional activities. This paper applies a stochastic control model to examine the joint effects of these factors on a bank's optimal investment decisions in non-traditional banking and develops some empirically testable hypotheses.
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