On Bankers and Their Incentives Under Universal Banking

Abstract

In the absence of managerial agency, scope economies in the combination of lending with other forms of financial intermediation may enable multitasking bankers to provide intermediation services more efficiently than specialist commercial and investment bankers. But the incentives of a multitasking banker are different from those of a specialist. This paper develops a multitasking principal-agent model of universal banking to study these incentive effects and identify what activities are optimally combined with lending and under what circumstances. On the one hand, multitasking may reduce the scope of moral hazard in a banker's relationship with the employing intermediary to such an extent that a universal bank not only operates at lower cost than a separate commercial and investment bank in aggregate, but even at lower cost than a commercial bank by itself. On the other hand, even where commercial and investment banking completely overlap in the physical costs of production, agency problems may make universal banking prohibitively expensive or prompt universal banks not to screen borrowers as intensively as commercial banks. These results have implications for the regulation and internal organization of financial intermediaries.