| Publisher | University of Pennsylvania | ||
|---|---|---|---|
| Format | 319.3KB PDF, requires Acrobat Rdr 5 | Date added | 27 Sep 1999 |
| Topics | Bank Management, Accounting Applications | ||
| Downloads | 37 | ||
Should lenders diversify, as suggested by the financial intermediation literature, or specialize, as suggested by the corporate finance literature?Experts on financial institutions generally follow Cervantes and argue that lenders such as banks, finance companies, and life insurers are typically highly levered, and diversification across sectors reduces their chance of costly financial distress.This white paper describes the impact of diversification when the bank’s monitoring incentives are not an issue. It also examines diversification when the bank’s monitoring incentives are weaker and underinvestment may be a problem. It looks at incorporating bank equity capital, competitive considerations, and unobservable allocations of loans across sectors.
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