Robert Dickler

Index of Contributors

Coherent vs. Haphazard Diversification

of Multiproduct Financial Firms:

Scale, Scope and Rent-Seeking

Robert A. Dickler

IMADEC University® and Strateco GmbH

Abstract

Diversification of multiproduct financial firms may be either coherent or haphazard. The emergence of the dominant type of firm in the financial system is determined to a large extent by (i) the strategic interaction of the intermediary in relational or arm’s length transactions with its customers and by (ii) the firms‘ corporate governance coalitions’ adaptation of organizational design to the incentives created by institutions embodying the regulatory regime’s loss function, which is parameterized by regulators’ beliefs about market volatility and their attitudes towards risk. Only in a prudential regulatory regime is it likely that a coherent multiproduct financial firm, which earns informational and reputational rents, and which is governed by a coalition of the regulatory risk averse general manager with farsighted, reputational risk averse relationship managers, will exploit opportunities of path dependence, learning effects and innovation to emerge as the dominant type in an evolutionary stable state of the financial system. The emergence of each of the other three possible types of haphazardly diversified multiproduct financial firms corresponds to the prevalence of the respective three different types of non-prudential regulatory regimes: (i) deferential towards financial firms; (ii) preferential towards Special Interest Groups; (iii): preferential towards networks of individuals (cronies, cliques, clans, oligarchs). The micro level of the financial system (organizational design, regulatory regime) interacts with the macro level (political regime) to determine evolutionary systemic performance (change in adaptive efficiency and financial stability). A case study of Cerberus’s acquisition of BAWAG-PSK in Austria provides a comparative historical institutional analytical narrative to validate a counterfactual conjecture about the necessary and sufficient conditions for coherent diversification: Had the financial crisis not occurred, the alignment of the organization with the coherent strategy of product and geographic diversification, to be executed by integrating GMAC’s innovative securitization and risk management capabilities with BAWAG’s CEE/SEE regional relationship management capabilities, would not have been abandoned.