Banking diversity, financial complexity and resilience to financial shocks: evidence from Italian provinces

Abstract

ABSTRACT In this paper, we investigate the influence of banking and financial diversity on stability. We compute an index of banking diversity for Italian provinces and, drawing on network theory, we propose a measure of the diversity and development of the overall provincial financial sector. Our results show that diversity in the banking and financial markets promotes greater stability. Such beneficial effects are particularly evident during periods of financial distress. We ascribe our findings to the better diversification achieved by more diverse financial systems, as documented by lower loan concentration and higher loan diversification in terms of economic destination and borrower category.