Logo Logo
Switch Language to English
Hakenes, Hendrik und Schnabel, Isabel (April 2006): The Threat of Capital Drain: A Rationale for Public Banks? SFB/TR 15 Discussion Paper No. 107




This paper yields a rationale for why subsidized public banks may be desirable from a regional perspective in a financially integrated economy. We present a model with credit rationing and heterogeneous regions in which public banks prevent a capital drain from poorer to richer regions by subsidizing local depositors, for example, through a public guarantee. Under some conditions, cooperative banks can perform the same function without any subsidization; however, they may be crowded out by public banks. We also discuss the impact of the political structure on the emergence of public banks in a political-economy setting and the role of interregional mobility.