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On the Incentive Problems in Financial Conglomerates

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  • Lóránth, Gyöngyi

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.

Suggested Citation

  • Lóránth, Gyöngyi, 2002. "On the Incentive Problems in Financial Conglomerates," CEPR Discussion Papers 3453, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:3453
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    Cited by:

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

    More about this item

    Keywords

    Asymmetric Information; Financial Innovations; Mergers;

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General

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