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Fin 286
Group Readings Assignment Number 1
Summer 2008
You can complete this assignment in pairs, you will both receive the same grade on the assignment. It is
intended that you discuss the issues, not just each person writing part of the assignment.
Due July 16
Read: “Bank Diversification, Economic Diversification” by Philip Strahan; “How Firms Measure
Financial Risk” by Jose Lopez from the Federal Reserve Bank of San Francisco; “The Challenges of Risk
Management in Diversified Financial Companies” by Christine Cumming and Beverly Hirtle; and “Risk
management in financial institutions: a speech at the Federal Reserve Bank of Chicago's Annual
Conference on Bank Structure and Competition” by Ben Bernanke, (there is a link on your syllabus
to each article) and answer the following questions
a. One article argues that increased integration of financial services has decreased economic
volatility. However, recent economic events have suggested that this integration and growth of
larger banks may have contributed to economic volatility. It is possible that large mergers in the
industry might create banks which are too large? Explain the regulatory worries associated with a
single bank controlling too much of the market. What reasons for regulation that we discussed in
class are limits on size of the institutions trying to address? Do you agree or disagree with the
statement that the changes since 1999 have created a more stable economy? Explain in detail
including any outside sources that you want to reference.
b. What example doe Ben Bernanke reference when discussing the need for consolidation of risk
management across an institution? Which of the challenges referenced by Cumming and Hirtle
does this correspond to? Relate the challenges in Cumming and Hirtle to the situation described
by Bernanke. Use the example from Bernanke as an illustration and base to explain / illustrate
the challenges referenced by Cumming and Hirtle. If you do not think that the example in the
Bernanke speech ties to a specific challenge try to provide a hypothetical illustration (other than
one used in the article) to illustrate their point.
c. Could the changes in economic volatility be a product of changes in risk management in the
financial industry, instead of just diversification by the banking sector? Which do you think has a
larger impact on the overall economy (include an explanation of how financial institutions relate
to economic growth)? A few things to think about: Given the challenges of risk management in
large financial institutions do you think that the importance of a consolidated risk management
policy has increased or decreased in recent years? Given today’s economic environment what do
you see as the largest challenges to developing a consolidated risk management policy (which of
the things in the article are the most challenging today)?