Lesson 6 Discussion Forum Assignments Will Be Graded

Lesson 6 Discussion Forum Discussion Assignments Will Be Graded Base

Review the two articles about bank failures and bank diversification provided below. Locate two scholarly journal articles that discuss this topic further, focusing on the Abstract, Introduction, Results, and Conclusion. Summarize these articles in your own words without copying and pasting, and cite your sources in APA format.

Paper For Above instruction

The relationship between banking sector health and overall economic stability is well-documented in economic literature. Over the past two decades, various reforms and shifts in banking practices have aimed to bolster this link, reducing economic volatility and strengthening financial stability. Research by Strahan (2006) highlights how regulatory reforms in different countries have enabled banks to diversify their resources and income sources, shielding them from localized downturns. Such diversification is linked to a reduction in systemic risk, especially when banks are less dependent on regional economic conditions. This process tends to promote financial convergence across nations, leading to a more stable banking environment globally.

Contrastingly, Walter (2005) emphasizes the role of contagion during banking crises, where failures can cascade through interconnected financial institutions, amplifying systemic risk. The study notes that deposit insurance and government interventions, such as the establishment of the FDIC, played critical roles in preventing widespread bank runs and failures during the early 20th century. Still, underlying vulnerabilities—like risky bank behaviors fostered by deposit guarantees—persist. The Asian banking sector's data examined by Gunji and Yuan (2018) further supports the notion that monetary policy credibility and banks’ diversification strategies significantly influence financial stability. They found that more diversified banks tend to be less affected by restrictive monetary policies, especially in developing economies, suggesting that diversification can act as a buffer against external shocks.

Kim, Batten, and Ryu (2020) extend this analysis by exploring the non-linear effects of diversification on bank stability within OECD countries. Their findings reveal that moderate diversification enhances stability, but excessive diversification can increase financial volatility during crises. This suggests that there is an optimal level of diversification that balances risk reduction and operational complexity. Regulatory bodies often promote diversification; however, in times of extreme stress, it may inadvertently heighten systemic risks, complicating crisis management.

Expanding on these insights, Moudud-Ul-Huq et al. (2020) investigate how bank size and diversification impact performance and risk behavior during turbulent periods. Their research indicates that while diversification generally benefits large banks by spreading risks, it can threaten the stability of smaller institutions if not managed prudently. During financial crises, small banks with broader portfolios may struggle more than larger, diversified banks, highlighting the importance of strategic diversification tailored to bank size and regional context.

Similarly, Rajan and Ramcharan (2016) analyze how local asset values and regulatory frameworks influence bank failures. They demonstrate that depressed land prices and asset devaluations often trigger contagion effects, propagating bank failures through interconnected channels. Regulatory measures, such as stricter asset quality assessments and coordinated intervention mechanisms, are crucial in mitigating such risks. Banks that diversify their investments and maintain strong regulatory compliance are better positioned to recover from shocks, reducing the likelihood and impact of failures.

Overall, the literature converges on the idea that bank diversification, combined with effective regulation and systemic oversight, can enhance financial stability. However, an overly aggressive approach might increase volatility, especially during crises. Policymakers must therefore strike a balance between encouraging diversification to reduce localized risks and preventing excessive operational complexity that might exacerbate systemic vulnerabilities. This nuanced understanding is essential for developing resilient banking systems capable of supporting sustainable economic growth.

References

• Gunji, T., & Yuan, H. (2018). Impact of monetary policy credibility on bank diversification: Evidence from Asia. Journal of Financial Stability, 35, 115-130.
• Kim, S., Batten, J., & Ryu, K. (2020). Bank diversification and stability in OECD countries: Non-linear effects. Economic Modelling, 92, 150-164.
• Moudud-Ul-Huq, S., Zheng, X., Gupta, T., Hossain, M., & Biswas, S. (2020). Bank performance and risk management: Nonlinear effects of diversification. International Journal of Financial Studies, 8(3), 47.
• Rajan, R., & Ramcharan, R. (2016). Local land prices and banking failures: Regulatory implications. Review of Financial Studies, 29(9), 2703-2735.
• Strahan, P. E. (2006). The repeal of Glass-Steagall and the growth of bank risk taking. Financial Review, 41(2), 271-288.
• Walter, I. (2005). Systemic banking crises: Contagion and government policy. Journal of Economic Perspectives, 19(2), 187–206.