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On the Incentive Problems in Financial Conglomerates

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  • Lóránth, Gyöngyi
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    Abstract

    This paper analyses the effects of scope expansion on the core activity of banks and provides a rationale for their interest in offering a wider product range. We show that scope economies may stem from moral hazard in the core business, and argue that a cost of scope expansion might be the inability of banks to credibly commit to penalize their clients in the event of default or poor performance. We find that inefficiencies in conglomerate banks are more prone to occur when competition in the additional activity is intense, and when willingness of firms to pay for a new financial product is higher.

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    File URL: http://www.cepr.org/pubs/dps/DP3453.asp
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    Bibliographic Info

    Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3453.

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    Date of creation: Jul 2002
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    Handle: RePEc:cpr:ceprdp:3453

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    Related research

    Keywords: Asymmetric Information; Financial Innovations; Mergers;

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    Cited by:
    1. Xavier Freixas, 2005. "Deconstructing relationship banking," Investigaciones Economicas, Fundación SEPI, vol. 29(1), pages 3-31, January.

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