I examine the impact of diversity (ethnic and religious fractionalization and polarization) on banking stability in Sub-Saharan Africa (SSA). Using data from 1996 to 2014, I employ the system Generalized Method of Moments (sys-GMM) approach to examine this relationship. I find that countries in SSA are more polarized religiously than they are ethnically. The region is, however, more ethnically fractionalized than they are religiously. Further, I conjecture that banks in more heterogeneous societies will experience poor asset quality and lower stability. I however postulate that banks offset the risks from diversity at certain levels of net interest margin (NIM). I provide empirical evidence to support these conjectures. I find varying threshold NIM values for each diversity indicator depending on the stability measure used. Opening up the banking system to foreign entry can help offset the negative impact of diversity on banking stability. Policy implications are discussed.

This article examines the aftermath of the 1897 Riksbank Act in Swedish banking. The act placed banks with unlimited liability and those with limited liability on equal footing, removing the note-issuing privileges of the former. We consider whether changes in risk preferences occurred subsequent to the act, or whether extended liability was a sufficient deterrent. We conclude that when legal differences were removed, lower transaction costs for unlimited liability banks (ULBs) spurred aggressive competition, reflected in narrower interest spreads relative to limited liability banks (LLBs). ULBs also took on greater leverage and held less liquidity, which supports the Coasean interpretation that the shareholder liability regime mattered little. After 1897, ULB shareholders continued to receive higher dividends, enjoyed substantially superior returns on equity, and maintained an array of corporate governance controls to shield themselves against their additional risk.

Korea has been a forerunner in incorporating macroprudential policies to mitigate the vulnerabilities from currency crises that can turn into a more generalised liquidity crisis. This paper examines longer-term design issues for a more resilient and stable financial system that could be expected to complement the existing macroprudential measures in achieving a more stable financial system. In particular, the paper examines the rationale and mechanics of a new public financial institution, provisionally called the Exchange Stabilisation and Guarantee Corporation (ESGC) whose main role is to buy dollar forward positions from Korean exporting companies who wish to hedge the currency exposure from long-term export orders. The ESGC is intended to mitigate the risks arising from the reliance on the role of the banking sector in providing currency hedging services to exporters. Rapid growth of short-term foreign currency denominated debt has been the result of banks receiving forward dollar sales by exporters, and then hedging the long dollar position by borrowing short in dollars. A public institution that can buy dollars forward, but which is designed so that there is no need to hedge by taking short dollar debt, can mitigate the rapid increase in short-term dollar debt in booms.