Banks' Size, Scope and Systemic Risk: What Role for Conflicts of Interest?

49 Pages Posted: 14 Feb 2014 Last revised: 6 Mar 2014

See all articles by Olivier De Jonghe

Olivier De Jonghe

Tilburg University - Department of Finance; National Bank of Belgium - Research Department; Tilburg University - European Banking Center

Maaike Diepstraten

Tilburg University; De Nederlandsche Bank

Glenn Schepens

ECB -Financial Research Division

Date Written: February 12, 2014

Abstract

We show that the effect of diversification on systemic risk exposures varies with bank size and a country's institutional setting. Non-interest income reduces large banks' systemic risk exposures, whereas it increases that of small banks. However, exploiting heterogeneity in countries' institutional setting, we show that the bright side of innovation by large banks (lower systemic risk exposure for diversified banks) disappears in countries with more private and asymmetric information, more corruption and in concentrated banking markets. These empirical findings support Saunders and Cornett (2011) their conjectures on which features make the materialization of conflicts of interest more likely.

Keywords: systemic risk, diversification, innovation, conflicts of interest, global sample

JEL Classification: G21, G28, L51

Suggested Citation

De Jonghe, Olivier and Diepstraten, Maaike and Schepens, Glenn, Banks' Size, Scope and Systemic Risk: What Role for Conflicts of Interest? (February 12, 2014). Available at SSRN: https://ssrn.com/abstract=2394884 or http://dx.doi.org/10.2139/ssrn.2394884

Olivier De Jonghe (Contact Author)

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
0031-13-466.2650 (Phone)

National Bank of Belgium - Research Department ( email )

Research Department
Boulevard de Berlaimont 14
B-1000 Brussels, 1000
Belgium

Tilburg University - European Banking Center ( email )

PO Box 90153
Tilburg, 5000 LE
Netherlands

Maaike Diepstraten

Tilburg University ( email )

P.O. Box 90153
Tilburg, DC 5000 LE
Netherlands

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Glenn Schepens

ECB -Financial Research Division ( email )

Frankfurt am Main
Germany

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