Can Banks in Emerging Economies Benefit from Revenue Diversification?

47 Pages Posted: 24 Dec 2007 Last revised: 31 Jan 2010

See all articles by Sarah Sanya

Sarah Sanya

International Monetary Fund

Simon Wolfe

University of Southampton - School of Management; University of Southampton - Southampton Business School

Date Written: January 2010

Abstract

Are there significant benefits of revenue diversification for banks in emerging economies? This paper investigates the impact of revenue diversification on insolvency risk in emerging economies as measured by the distance to default. Using a panel dataset of 322 listed banks across 22 countries and a new methodological approach (Systems' Generalized Method of Moments estimator), we provide the first empirical evidence of the impact of (i) the observed shift towards non-interest income and (ii) diversification within interest and non-interest generating activities on insolvency risk. Our core finding is that diversification across and within both interest and non-interest income generating activities decreases insolvency risk. Moreover, we find diversification gains remain even though increased reliance on non-interest income lowers risk adjusted profits. By extension, our results have significant strategic implications for bank managers and supervisors in emerging economies.

Keywords: Emerging Economies, Revenue Diversification, Banks, Insolvency Risk

JEL Classification: G10, G21, G28

Suggested Citation

Sanya, Sarah O. and Wolfe, Simon, Can Banks in Emerging Economies Benefit from Revenue Diversification? (January 2010). Available at SSRN: https://ssrn.com/abstract=1077842 or http://dx.doi.org/10.2139/ssrn.1077842

Sarah O. Sanya

International Monetary Fund ( email )

700 19th Street, NW
Washington, DC 22209
United States
2026239598 (Phone)

Simon Wolfe (Contact Author)

University of Southampton - School of Management ( email )

Highfield
Southampton S017 1BJ, Hampshire SO17 1BJ
United Kingdom

University of Southampton - Southampton Business School ( email )

Southampton, SO17 1BJ
United Kingdom

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