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Diversification at financial institutions and systemic crises

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Author Info
Wagner, Wolf (Tilburg University, Center for Economic Research)

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Abstract

We show that the diversification of risks at financial institutions has unwelcome effects by increasing the likelihood of systems crises. As a result, complete diversification is not warranted adn the optimal degree of diversification is arbitrarily low. We also identify externalities that cause financial institutions to diversify beyond diversification may thus have reduced welfare.

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Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 71.

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Date of creation: 2006
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Handle: RePEc:dgr:kubcen:200671

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Find related papers by JEL classification:
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  5. Sandro Brusco & Fabio Castiglionesi, 2007. "Liquidity Coinsurance, Moral Hazard, and Financial Contagion," Journal of Finance, American Finance Association, vol. 62(5), pages 2275-2302, October. [Downloadable!] (restricted)
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  14. Goldstein, Itay & Pauzner, Ady, 2004. "Contagion of self-fulfilling financial crises due to diversification of investment portfolios," Journal of Economic Theory, Elsevier, vol. 119(1), pages 151-183, November. [Downloadable!] (restricted)
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  19. Aghion, Philippe & Bolton, Patrick & Dewatripont, Mathias, 2000. "Contagious bank failures in a free banking system," European Economic Review, Elsevier, vol. 44(4-6), pages 713-718, May. [Downloadable!] (restricted)
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  22. Wagner, Wolf, 2006. "The broadening of activities in the financial system : implications for financial stability and regulation," Discussion Paper 72, Tilburg University, Center for Economic Research. [Downloadable!]
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  24. Huberto M. Ennis, 2003. "Economic fundamentals and bank runs," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 55-71. [Downloadable!]
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Olivier De Jonghe, 2009. "Back to the basics in banking ? A micro-analysis of banking system stability," Research series 200906-26, National Bank of Belgium. [Downloadable!]
    Other versions:
  2. Christian Calmès & Raymond Théoret, 2009. "The Impact of Off-Balance-Sheet Activities on Banks Returns: An Application of the ARCH-M to Canadian Data," RePAd Working Paper Series UQO-DSA-wp032009, Département des sciences administratives, UQO. [Downloadable!]
  3. Wagner, Wolf, 2006. "The broadening of activities in the financial system : implications for financial stability and regulation," Discussion Paper 72, Tilburg University, Center for Economic Research. [Downloadable!]
  4. 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. [Downloadable!]
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This page was last updated on 2009-11-25.

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