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Working Paper

Banking and Commerce: A Liquidity Approach

This paper looks at the advantages and disadvantages of mixing banking and commerce, using the "liquidity" approach financial intermediation. Adding a commercial firm makes it easier for a bank to dispose of assets seized in a loan default. This 'internal market' increases the liquidity of such assets and improves the bank’s ability to perform financial intermediation. More generally, owning a commercial firm may act either as a substitute or a complement to commercial lending. In some cases, a bank will voluntarily refrain from making loans, choosing to become a non-bank bank in an unregulated environment.

Suggested Citation

Haubrich, Joseph G., and João Cabral dos Santos. 1999. “Banking and Commerce: A Liquidity Approach.” Federal Reserve Bank of Cleveland, Working Paper No. 99-07.