The Marketability Of Bank Assets And Managerial Rents: Implications For Financial Stability
Source: University of Cambridge
Financial innovation and greater information availability have increased the tradability of bank assets and reduced banks' dependence on individual bank managers as private information in the lending process declines. In this paper the authors argue that this has two effects on banks, with opposing implications for banking stability. First, the hold-up problem between bank managers and shareholders becomes less severe. Consequently, banks' capital structure needs to be less concerned with disciplining the management. Deposits the most effective disciplining device can be reduced, increasing banks' resilience to adverse return shocks.