The Threat of Capital Drain: A Rationale for Public Banks?

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

Abstract

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.

• Item Type: Paper
• Keywords: Public banks, cooperative banks, capital drain, credit rationing, financial integration, privatization.
• Faculties: Special Research Fields > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems; Special Research Fields > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems > B3 - Unternehmenskontrolle, Unternehmensfinanzierung und Effizienz
• Subjects: 300 Social sciences > 330 Economics
• JEL Classification: G21, F36, H11, L33
• Language: English