Strategic incentives of banking services in correlated markets

Abstract

Banks have different practices towards big corporations and small enterprises for financing. While these two markets are quite distinct, correlations exist between them. Given its competitive advantages, a bank may perceive certain market as its strategic business. In this paper, we investigate markets that exhibit important “stochastic correlations”. Importantly, the correlated needs have no connection to whether services in the markets are complements or substitutes. By examining the strategic incentive under different market settings, we develop a theoretical model for banking services in which clients are heterogeneous and financial markets are stochastically interdependent. Within this framework, we also look at the impact of government policies on the banks' service decision. This paper points out the incentive issues of the bank operations that may require public intervention. We show that tax policies may affect the operating decision. Government subsidies have no impact but both enhanced profit and sales taxes reduce the benefits from cross-market services.