On the Incentive Problems in Financial Conglomerates

Lóránth, Gyöngyi

No 3453, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: Asymmetric information; Financial innovations; Mergers (search for similar items in EconPapers)
JEL-codes: G20 G30 G34 L20 (search for similar items in EconPapers)
Date: 2002-07
New Economics Papers: this item is included in nep-cfn
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Citations: View citations in EconPapers (1)

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