Banking and Trading | Zendy

Arnoud W. A. Boot | Zendy; Lev Ratnovski | Zendy

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Banking and Trading

Author(s) -

Arnoud W. A. Boot,

Lev Ratnovski

Publication year - 2016

Publication title -

review of finance

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 4.933

H-Index - 61

eISSN - 1875-824X

pISSN - 1572-3097

DOI - 10.1093/rof/rfv069

Subject(s) - alternative trading system , business , algorithmic trading , high frequency trading , trading strategy , franchise , ex ante , value (mathematics) , scale (ratio) , capital market , capital (architecture) , monetary economics , economics , financial economics , finance , marketing , history , physics , archaeology , quantum mechanics , machine learning , computer science , macroeconomics

We study the interaction between relationship banking and short-term arm’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

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