Economics
Hendrik Hakenes, Isabel Schnabel
The Threat of Capital Drain: A Rationale for Regional Public Banks?
Volume 166 (2010) / Issue 4, pp. 662-689 (28)
This paper yields a rationale for why subsidized public banks may increase regional welfare 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 public guarantees. Under some conditions, cooperative banks can perform the same function without any subsidies; however, they may be crowded out by public banks. We also discuss the influence of the political structure on the emergence of public banks in simple political-economy settings and the role of interregional mobility.