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Cross-sector diversification in financial conglomerates: simulations with a fair-value assets and liabilities model

Author

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  • Jacob A. Bikker

    (De Nederlandsche Bank, Directorate Supervision, Section Banking and Supervisory Strategies, Amsterdam (The Netherlands))

Abstract

Risk diversification is one of the many reasons for cross-sector mergers of financialinstitutes. This paper presents a fair-value type asset and liability model in order to identify diversification effects for financial conglomerates (PCs) under various shocks. My analysis for the Netherlands reveals that diversification effects on PCs of especially interest rate shocks are very strong. In principle, substantial diversificationeffects argue for lower capital requirements for PCs. However, there are other non-negligible risks run by PCs to consider, namely contagion risk, regulatory arbitrage andcross-sector and TBTF moral hazard risks, which have not yet been quantified.

Suggested Citation

  • Jacob A. Bikker, 2002. "Cross-sector diversification in financial conglomerates: simulations with a fair-value assets and liabilities model," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 55(223), pages 363-389.
    • Handle: RePEc:psl:bnlaqr:2002:42
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    References listed on IDEAS

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    Keywords

    ;

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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