Comparative Advantages in Banking and Strategic Specialization and Diversification

26 Pages Posted: 12 May 2009 Last revised: 24 Jul 2014

See all articles by Indrajit Mallick

Indrajit Mallick

Centre for Studies in Social Sciences Calcutta

Date Written: May 12, 2009

Abstract

This paper explores how banks specialize into different activities when they start with differing comparative advantages in some industry or geographic area or product. The possibility of coordination failure, i.e. wrong specialization is highlighted with risk neutral financial intermediaries. Mechanisms for eliminating the coordination failure are discussed. Too much diversification takes place with risk averse financial intermediaries and is shown to be mitigated by financial innovation in banking like credit derivatives and securitization.

Keywords: Comparative Advantage, Cournot Competition, Coordination Failure, Diversification, Financial Innovation

JEL Classification: G100, G 190, G210

Suggested Citation

Mallick, Indrajit, Comparative Advantages in Banking and Strategic Specialization and Diversification (May 12, 2009). Available at SSRN: https://ssrn.com/abstract=1403093 or http://dx.doi.org/10.2139/ssrn.1403093

Indrajit Mallick (Contact Author)

Centre for Studies in Social Sciences Calcutta ( email )

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