Comparative Advantages in Banking and Strategic Specialization and Diversification
26 Pages Posted: 12 May 2009 Last revised: 24 Jul 2014
Date Written: May 12, 2009
This paper explores how banks specialize into different activities when they start with differing comparative advantages in some industry or geographic area or product. The possibility of coordination failure, i.e. wrong specialization is highlighted with risk neutral financial intermediaries. Mechanisms for eliminating the coordination failure are discussed. Too much diversification takes place with risk averse financial intermediaries and is shown to be mitigated by financial innovation in banking like credit derivatives and securitization.
Keywords: Comparative Advantage, Cournot Competition, Coordination Failure, Diversification, Financial Innovation
JEL Classification: G100, G 190, G210
Suggested Citation: Suggested Citation