Cross - Selling Lending and Underwriting : Scope Economies and Incentives ∗

We highlight the implications of combining underwriting services and lending for the choice of underwriters and for competition in the underwriting business. We show that cross-selling can increase underwriters’ incentives, and we explain three phenomena: first, that cross-selling is important for universal banks to enter the investment banking business; second, that cross-selling is particularly attractive for highly leveraged borrowers; third, that less-than-market rates are no prerequisite for cross-selling to benefit a bank’s clients. In our model, cross-selling reduces rents in the underwriting business. JEL Classification: G21, G24, D49 “Perhaps it was not such a bright idea to offer credit to investment-banking clients at lessthan-market rates—even though this has been a chief calling card over the past few years for those commercial banks that wanted to get into the juicy business of investment banking. After all, it is precisely the riskiest borrowers, those who have trouble borrowing elsewhere, that are most likely to take up aspiring investment banks on their offers of credit.” (The Economist, “Thanks a bundle,” August 24, 2002)