Transition Finance, Banking and Currency Research

Transition Studies Review

, Volume 16, Issue 1, pp 77-91

First online:

Bank Monitoring and Role of Diversification

  • Matej MarinčAffiliated withFaculty of Economics, University of LjubljanaAmsterdam Center for Law & Economics (ACLE), University of Amsterdam Email author 

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I present a framework of banking in which banks’ main role is to monitor their borrowers. Within this framework I analyze the benefits of diversification and the threats of systemic risk and inter-bank competition. Diversification improves banks’ monitoring incentives. High systemic risk not only hampers banks’ monitoring incentives, but also makes diversification less effective. I also show that competition lowers monitoring incentives. I match the insights of the analysis with the abundant literature on the role of banks on the asset-side and provide some implications for recent developments in banking.


Diversification Systemic risk Bank regulation

JEL Classification

G21 G28