Financial claims and product market competition: An explanation for permitting banks to hold equity in firms

• Main Authors: Pao Shin-Heng, Lin Jyh-Horng
• Format: Article
• Language: English
• Published: University of Belgrade 2008-01-01
• Series: Yugoslav Journal of Operations Research
• Subjects: equity holding; Glass-Steagall act; conjectural variation; capital regulation
• Online Access: http://www.doiserbia.nb.rs/img/doi/0354-0243/2008/0354-02430802235P.pdf

This paper examines financial claims for lending if banks are permitted to hold equity in productive firms. We demonstrate that in situations where an oligopolistic product market has relatively high competition, e.g., quasi-competitive behavior, equity holding by banks is likely to do little damage. However, where the product market has relatively high collusion, e.g., corporative behavior, equity holding by banks are very unlikely to hold equity in firms. Our findings provide an alternative argument that lifting the Glass-Steagall Act restricting banks from holding equity in firms should give little cause for concern.