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Comparative advantages in banking and strategic specialization and diversification

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  • Mallick, Indrajit

Abstract

This paper shows how banks specialize in different activities when they start with different comparative advantages. The possibility of wrong specialization is shown in a Cournot game with convexities. Different resolution mechanisms are discussed. With risk averse financial intermediaries, excessive diversification is shown to be a problem. Financial innovation like credit derivatives and securitization can mitigate the problem and result in optimal specialization and diversification patterns.

Suggested Citation

  • Mallick, Indrajit, 2002. "Comparative advantages in banking and strategic specialization and diversification," MPRA Paper 32605, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:32605
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    File URL: https://mpra.ub.uni-muenchen.de/32605/1/MPRA_paper_32605.pdf
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    References listed on IDEAS

    as
    1. Winton, Andrew, 1997. "Competition among Financial Intermediaries When Diversification Matters," Journal of Financial Intermediation, Elsevier, vol. 6(4), pages 307-346, October.
    2. Sherrill Shaffer, 1989. "Pooling intensifies joint failure risk," Working Papers 89-1, Federal Reserve Bank of Philadelphia.
    3. Yosha, Oved, 1997. "Diversification and Competition: Financial Intermediation in a Large Cournot-Walras Economy," Journal of Economic Theory, Elsevier, vol. 75(1), pages 64-88, July.
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    Cited by:

    1. Mallick, Indrajit, 2004. "Does the Future of the Indian Public Sector Banks lie in Mergers and Acquisitions?," MPRA Paper 32866, University Library of Munich, Germany.

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    More about this item

    Keywords

    Comparative Advantage; Specialization; Diversification;
    All these keywords.

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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