Thirdly, the rapid balance sheet growth also required more interbank financing, which resulted in more interconnectedness in the financial network, thus creating even more contagion channels.12 [Page 4: Increased leverage as illustrated by shifts in funding structures] Another risk of a systemic nature is that diversification along similar lines can make financial institutions more alike by exposing them to the same risks.13 And indeed, the benefits of diversification appear to have been offset by the greater risk banks were exposed to as the share of activities outside the traditional retail banking operations was increasing.14 Some potential benefits of diversification may also have been lost as implementing a diversification strategy is a big managerial challenge.15 It is particularly challenging in a banking group because of the differences in management cultures and risk profiles of the different entities.
The challenge at hand is to reform the financial sector and banks towards a more healthy size and structure in order to redirect banking activities to support the society and the real sector in the best way possible.