The Effects of Diversification on Bank Performance from the Perspective of Risk, Return and Cost Efficiency
17 Pages Posted: 25 Aug 2008 Last revised: 6 Apr 2011
Date Written: August 25, 2008
The question of whether banks should diversify or focus in their activities may have different implications for a market where the banking industry is more settled versus a growth market that has not yet fully saturated. The aim of this paper is to investigate whether diversification pays off, in terms of risk return and cost efficiency, in a market which shows a great deal of growth potential.
The results of our empirical study can be summarized as follows: banks that are more diversified have higher return measured as return on solvency as well as increased credit risk. The cost income efficiency of more diversified banks is also higher than more focused ones. Our results also show that diversification does not have a significant impact on the market risk of a bank.
Keywords: Diversification, bank risk, return on solvency
JEL Classification: G21
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