PRIVATIZING MULTIPRODUCT BANKS

In October 1983, following a stock market crash, the Israeli governmen t became the owner of most of the banking system in the country. The g overnment is now getting ready to privatise the banks. Using a simple model of imperfect competition between multi-product banks, the paper evaluates two proposals which have been raised in this context: spinni ng off entire divisions versus splitting the banks into smaller banks. The degree of substitutability between banking products (e.g. short-a nd long-term credit) plays a key role in the analysis. Implications fo r banking reform in other countries are briefly discussed.