Wednesday, May 19, 2010

No need for bank diversification?

The FT's Lex asks why BoA is divesting assets in strongly growing Brazil and concludes that increased capital requirements and reduced leverage reduces the need for diversification to stabilise earnings.

A potential answer is that global banking models are being subtly revised in response to increased regulation. One of the little understood mysteries of the boom years is why banks expanded internationally when there were no synergy benefits and shareholders could themselves diversify more efficiently. The reason was leverage: if you are 30 times geared, it is crucial to have a stable earnings base. Geographic diversification was one way to get it, even if returns in individual countries were low.

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