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Financiers of the world, disunite

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  • Jiaqi Chen
  • Jeffery W. Gunther

Abstract

Diversity across banks and other financial firms promotes a resilient financial system because differing risk profiles reduce the likelihood of systemic crises caused by shared economic shocks. Consolidation and uniformity among banks and other financial intermediaries do the opposite. ; Yet some have suggested that any policy steps to reverse the financial system’s dramatic consolidation might yield little stability benefit because herd-like behavior among financial firms could still reduce diversity and mitigate any strengthening. If these firms moved in concert, the argument goes, they would make themselves susceptible to common shocks as if they had adopted a more consolidated structure. ; Countering this concern are indications that financial firms, when allowed to flourish, display stability-enhancing diversity. We find that hedge funds—despite a reputation for high-risk strategies and correlated behavior—recently have exhibited significant strategic dissimilarities, to the benefit of system stability.

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File URL: http://www.dallasfed.org/assets/documents/research/eclett/2011/el1113.pdf
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Bibliographic Info

Article provided by Federal Reserve Bank of Dallas in its journal Economic Letter.

Volume (Year): 6 (2011)
Issue (Month): nov ()
Pages:

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Handle: RePEc:fip:feddel:y:2011:i:nov:n:v.6no.13

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Keywords: Financial risk management;

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