Is Bank Income Diversification Beneficial? Evidence from an Emerging Economy
42 Pages Posted: 23 Feb 2010 Last revised: 11 Jun 2013
Date Written: April 3, 2013
This paper examines the impact of bank revenue diversification on the performance of banks in an emerging economy. Using a unique dataset with detailed information on non-interest income, our findings show that, conversely to studies on Western economies, a shift towards non-interest activities increases bank profits and risk-adjusted profits particularly when they are more involved in trading in government securities. Our results also indicate that foreign banks benefit more from such a shift than their domestic counterparts. Moreover, we account for the institutional and regulatory environment advocating loans to SMEs and find that higher involvement in non-interest activities is only beneficial for banks with low exposures to SMEs. Our findings have important policy implications in terms of achieving optimal diversification and lower risk exposure, which might conflict with policies aiming to promote SME lending.
Keywords: Emerging economies, Bank Revenue Diversification, Bank Risk and Profitability
JEL Classification: G21, G28
Suggested Citation: Suggested Citation