Bank diversification, systemic risk, and market discipline
通过模型研究市场纪律能否引导追求股权价值最大化的银行选择社会最优的风险管理，发现市场纪律虽促使银行多元化，但多元化程度总是过度，因为多元化在降低个体风险的同时增加了系统性风险。
Can banks, aiming to maximize equity value, be induced through market discipline to adopt the socially optimal risk management? I seek an answer to this question with a model where banks perform risk management via asset diversification by exchanging a portion of their assets with the other bank and where market discipline is provided by bank creditors monitoring the bank by setting the cost of debt according to its diversification decision. While the market discipline induces the equity-maximizing bank to diversify in contrast to no diversification in the absence of market discipline, diversification is always excessive relative to the socially optimal level since diversification increases systemic risk while decreasing idiosyncratic risk. An increase in the financial distress costs from systemic risks makes market discipline less effective in inducing the equity-maximizing bank to choose diversification closer to the socially optimal level. On the other hand, the market discipline becomes more effective when financial distress costs from individual risks rise or when bank leverage ratios fall.