The interplay between competition, diversification and financial stability

Policymakers believe that there can be too much competition in banking. More intense competition may erode banking profits and increase risk-taking behaviour. Hence, there may exist a trade-off between competition and banking stability. Banks may try to escape from competition in intermediation activities by diversifying their activities both geographically and functionally. This diversification strategy may enable them to absorb shocks. However, one may wonder whether this will also expore banks to new sources of shocks.