Citation

Discussion Paper Details

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Title: On the Incentive Problems in Financial Conglomerates

Author(s): Gyöngyi Lóránth

Publication Date: July 2002

Keyword(s): Asymmetric Information, Financial Innovations and Mergers

Programme Area(s): Financial Economics

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.

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Bibliographic Reference

Lóránth, G. 2002. 'On the Incentive Problems in Financial Conglomerates'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=3453