Don ’ t Put All Your Eggs in One Basket ? Diversification and Specialization in Lending

@inproceedings{Winton1999DonT,
  title={Don ’ t Put All Your Eggs in One Basket ? Diversification and Specialization in Lending},
  author={Andrew Winton},
  year={1999}
}
Should lenders diversify, as suggested by the financial intermediation literature, or specialize, as suggested by the corporate finance literature? I model a financial institution’s (“bank’s”) choice between these two strategies in a setting where bank failure is costly and loan monitoring adds value. All else equal, diversification across loan sectors helps most when loans have moderate exposure to sector downturns (“downside”) and the bank’s monitoring incentives are weak; when loans have low… CONTINUE READING
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