Transition Studies Review

, Volume 16, Issue 1, pp 77–91

Bank Monitoring and Role of Diversification

Authors

    • Faculty of EconomicsUniversity of Ljubljana
    • Amsterdam Center for Law & Economics (ACLE)University of Amsterdam
Transition Finance, Banking and Currency Research

DOI: 10.1007/s11300-009-0047-4

Cite this article as:
Marinč, M. Transit Stud Rev (2009) 16: 77. doi:10.1007/s11300-009-0047-4
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Abstract

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.

Keywords

DiversificationSystemic riskBank regulation

JEL Classification

G21G28

Copyright information

© Springer-Verlag 2009