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Financial institutions currently face many opportunities, but a great deal of uncertainty surrounds their strategic decisions, particularly whether to specialize or diversify. While some firms providing a core set of services to a core customer base, others are offering a wide range of products and services to a wide range of customers. Central to these strategies is how firms will manage risk.
"There is no one correct response to the choice between specialization and diversification," observes Jamie B. Stewart, Jr., first vice president of the Federal Reserve Bank of New York. "Rather, success for any firm is going to involve settling upon one of these strategies and then properly executing it."
By focusing the discussion "on the incentives and choices facing firms," Mr. Stewart concludes, "we can develop a better understanding of future trends in the structure of the financial system."
Among the main observations made at the conference were:
· Advances in information technology will result in some firms becoming more specialized at the same time that consumers are gaining greater access to product information across firms.
· While some firms will continue to specialize, they will also use new technology to diversify into supporting products that add value for clients as well as deepen these primary customer relationships.
· Effective risk management will require more than just accurate risk measurement; in particular, good communication within a firm will be vital to managing risk.
· The merging of different types of firms--for example, the combination of a securities company representing a trading culture with a commercial bank representing a lending culture--will pose the greatest risk management challenges. Nevertheless, the successful blending of cultures across business lines will improve everyones ability to understand and control risk.