Income Diversification and Bank Performance During the Financial Crisis
40 Pages Posted: 25 Mar 2011 Last revised: 18 Dec 2012
Date Written: 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.
Keywords: Banks, Diversification, Performance, Financial Crisis
JEL Classification: G21, G28
Suggested Citation: Suggested Citation