Firm structure in banking and finance: is broader better?

A focal point in strategic and regulatory debates about the pros and cons of diversification among financial institutions continues to be the issue of economies of scope in financial intermediation. In this paper, we summarize the theoretical research on the value of diversification in financial services firms, and survey the empirical research so far on the conglomerate discount in U.S. and international financial services businesses. We also review research on the internal capital market efficiency of universal banks and financial conglomerates. The paper provides new empirical evidence on the conglomerate discount in U.S. financial intermediaries and how that changes between non-crisis and crisis periods, showing a decline in the discount under turbulent conditions.