Munich Personal RePEc Archive

Comparative advantages in banking and strategic specialization and diversification

Mallick, Indrajit (2002): Comparative advantages in banking and strategic specialization and diversification. Published in: Finance, Trade and Development , Vol. NA, No. NA (31. June 2004): pp. 1-26.

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Abstract

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.

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