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The homogenization of the financial system and financial crises

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  • Wagner, Wolf

Abstract

Financial institutions, especially large banks, have reached beyond their traditional activities in recent years and have become more homogeneous as a result. Even though this brings about diversification gains, we show that their stability may fall as consequence since institutions' incentives for taking on risk and supplying liquidity deteriorate. Optimal regulation should hence not provide a relief for diversification. However, we also identify an important benefit of this development. When financial institutions become more homogeneous, there is less need for risk sharing among them. This in turn mitigates the impact of any imperfections such risk sharing may be subject to.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Intermediation.

Volume (Year): 17 (2008)
Issue (Month): 3 (July)
Pages: 330-356

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Handle: RePEc:eee:jfinin:v:17:y:2008:i:3:p:330-356

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Web page: http://www.elsevier.com/locate/inca/622875

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Keywords: Conglomeration Consolidation Homogenization Financial crises Regulation Welfare;

References

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Citations

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Cited by:
  1. Mark Mink & Jakob de Haan, 2014. "Spillovers from Systemic Bank Defaults," CESifo Working Paper Series 4792, CESifo Group Munich.
  2. Jeroen Klomp & Jakob de Haan, 2011. "Banking risk and regulation: Does one size fit all?," DNB Working Papers 323, Netherlands Central Bank, Research Department.
  3. Calmès, Christian & Théoret, Raymond, 2014. "Bank systemic risk and macroeconomic shocks: Canadian and U.S. evidence," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 388-402.
  4. Christian Calmès & Raymond Théoret, 2011. "Bank systemic risk and the business cycle: An empirical investigation using Canadian data," RePAd Working Paper Series UQO-DSA-wp322011, Département des sciences administratives, UQO.
  5. Francesco Vallascas & Kevin Keasey, 2013. "The Volatility of European Banking Systems: A Two-Decade Study," Journal of Financial Services Research, Springer, vol. 43(1), pages 37-68, February.
  6. Calmès, Christian & Théoret, Raymond, 2010. "The impact of off-balance-sheet activities on banks returns: An application of the ARCH-M to Canadian data," Journal of Banking & Finance, Elsevier, vol. 34(7), pages 1719-1728, July.
  7. Klomp, Jeroen & Haan, Jakob de, 2012. "Banking risk and regulation: Does one size fit all?," Journal of Banking & Finance, Elsevier, vol. 36(12), pages 3197-3212.
  8. Graafland, J.J., 2009. "Calvin's Restrictions on Interest: Guidelines for the Credit Crisis," Discussion Paper 2009-90, Tilburg University, Center for Economic Research.
  9. Kero, Afroditi, 2013. "Banks’ risk taking, financial innovation and macroeconomic risk," The Quarterly Review of Economics and Finance, Elsevier, vol. 53(2), pages 112-124.
  10. Nijskens, Rob & Wagner, Wolf, 2011. "Credit risk transfer activities and systemic risk: How banks became less risky individually but posed greater risks to the financial system at the same time," Journal of Banking & Finance, Elsevier, vol. 35(6), pages 1391-1398, June.
  11. Augusto Hasman, 2013. "A Critical Review Of Contagion Risk In Banking," Journal of Economic Surveys, Wiley Blackwell, vol. 27(5), pages 978-995, December.
  12. DeYoung, Robert & Torna, Gökhan, 2013. "Nontraditional banking activities and bank failures during the financial crisis," Journal of Financial Intermediation, Elsevier, vol. 22(3), pages 397-421.
  13. Christian Calmès & Raymond Théoret, 2009. "Off-Balance-Sheet Activities and the Shadow Banking System: An Application of the Hausman Test with Higher Moments Instruments," RePAd Working Paper Series UQO-DSA-wp042009, Département des sciences administratives, UQO.
  14. Filson, Darren & Olfati, Saman, 2014. "The impacts of Gramm–Leach–Bliley bank diversification on value and risk," Journal of Banking & Finance, Elsevier, vol. 41(C), pages 209-221.
  15. Hagendorff, Jens & Vallascas, Francesco, 2011. "CEO pay incentives and risk-taking: Evidence from bank acquisitions," Journal of Corporate Finance, Elsevier, vol. 17(4), pages 1078-1095, September.
  16. David VanHoose, 2011. "Systemic Risks and Macroprudential Bank Regulation: A Critical Appraisal," NFI Policy Briefs 2011-PB-04, Indiana State University, Scott College of Business, Networks Financial Institute.
  17. Mark Mink, 2011. "Procyclical Bank Risk-Taking and the Lender of Last Resort," DNB Working Papers 301, Netherlands Central Bank, Research Department.
  18. Vallascas, Francesco & Hagendorff, Jens, 2011. "The impact of European bank mergers on bidder default risk," Journal of Banking & Finance, Elsevier, vol. 35(4), pages 902-915, April.
  19. Christian Calmès & Raymond Théoret, 2012. "Bank systemic risk and the business cycle: Canadian and U.S. evidence," RePAd Working Paper Series UQO-DSA-wp022012, Département des sciences administratives, UQO.

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