• Graduate Program
    • Why study Business Data Science?
    • Research Master
    • Admissions
    • Facilities
    • Browse our Courses
    • PhD Vacancies
    • PhD Placements
  • Research
  • Browse our Courses
  • Events
    • Events Calendar
    • Events Archive
    • Tinbergen Institute Lectures
    • Summer School
      • Deep Learning
      • Economics of Blockchain and Digital Currencies
      • Foundations of Machine Learning with Applications in Python
      • Marketing Research with Purpose
      • Modern Toolbox for Spatial and Functional Data
      • Sustainable Finance
      • Tuition Fees and Payment
      • Tinbergen Institute Summer School Program
    • Annual Tinbergen Institute Conference archive
  • News
  • Alumni

Boot, A. and Ratnovski, L. (2016). Banking and Trading Review of Finance, 20(6):2219--2246.

  • Journal
    Review of Finance
View publication

We study the interaction between relationship banking and short-term arm{\textquoteright}s length activities of banks, called trading. We show that a bank can use the franchise value of its relationships to expand the scale of trading, but may allocate too much capital to trading ex post , compromising its ability to build relationships ex ante . This effect is reinforced when trading is used for risk shifting. Overall, combining relationship banking and trading offers benefits under small-scale trading, but distortions may dominate when trading is unbridled. This suggests that trading by banks, while benign historically, might be distortive with deeper financial markets.