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Diversification, efficiency and risk of banks: New consolidating evidence from emerging economies

Author

Listed:
  • Jeon, Bang Nam

    (School of Economics LeBow College of Business Drexel University)

  • Wu, Ji

    (Southwestern University of Finance and Economics)

  • Chen, Limei

    (Fudan University)

  • Chen, Minghua

    (Southwestern University of Finance and Economics)

Abstract
This paper examines the impact of business diversification of banks on their risk, with efficiency taken into consideration as a conduit. Using bank-level data from more than 1400 commercial banks in 39 emerging economies during 2000-2016, we find that increased business diversification exerts two competing effects on bank risk, and overall reduces bank risk. The direct effect of increased diversification bolsters the stability of banks, but it is offset partially by the indirect effect whereby lowered efficiency, which is resulted from higher diversification, increases the riskiness of banks. This provides a consolidating evidence on the competing arguments on the diversification-efficiency nexus in the banking literature-the "diversification-premium" argument vs. the "diversification-discount" argument-with its extended implications on bank risk. In addition, we also present evidence that the diversification-bank risk nexus is heterogeneous on the bank size, market power and the ownership of banks, which provides useful policy implications for diversification strategies by bank managers as well as for the effective surveillance by bank regulators.

Suggested Citation

  • Jeon, Bang Nam & Wu, Ji & Chen, Limei & Chen, Minghua, 2020. "Diversification, efficiency and risk of banks: New consolidating evidence from emerging economies," School of Economics Working Paper Series 2020-10, LeBow College of Business, Drexel University.
    • Handle: RePEc:ris:drxlwp:2020_010
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    More about this item

    Keywords

    Diversification; Bank Efficiency; Bank Risk-Taking; Emerging Economies;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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