Income Diversification and Bank Performance During the Financial Crisis
University of Leeds; Universita' di Cagliari - Facolta' di Economia
Universita di Cagliari
University of Edinburgh - Business School
December 18, 2012
Advocates of diversifying bank income sources often argue that diversification improves the resilience of banks during periods of distress. To test this proposition, we analyze the impact of income diversification on the performance of Italian banks during the recent financial crisis. Using detailed data on the composition of bank income, we show that institutions that were diversified within narrow activity classes before the crisis experienced large declines in performance during the financial crisis. By contrast, diversification across broad activity classes, such as lending and capital market activities, did not cause performance losses during the crisis. Our results support limiting banks’ ability to diversify within narrow business lines, while permitting banks to diversify across broader activity classes.
Number of Pages in PDF File: 40
Keywords: Banks, Diversification, Performance, Financial Crisis
JEL Classification: G21, G28working papers series
Date posted: March 25, 2011 ; Last revised: December 18, 2012
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