Ownership Structure, Revenue Diversification and Insolvency Risk in European Banks

Abstract

The financial crisis brought to light weakness in the assessments of risks and vulnerabilities in banks. Consequently, an insight into how the ownership structure of a bank affects investment decisions, performance and ultimately insolvency risk - the focus of this paper - is crucial. Our results show revenue diversification reduces insolvency risk in banks with concentrated ownership structure. This is because a large shareholder influences strategic decisions as a means to protect its personal wealth. The link identified between ownership concentration and revenue diversification is a novel way of analyzing the impact of the latter on insolvency risk in banks. The results also have important policy implications for regulators interested in understanding the role corporate governance in banks plays in mitigating systemic risk.

Keywords: European banks, Revenue diversification, Corporate Governance, Ownership structure, Insolvency risk

JEL Classification: G21, G28, G32, G33