Income Diversification and Bank Performance During the Financial Crisis

40 Pages Posted: 25 Mar 2011 Last revised: 18 Dec 2012

See all articles by Francesco Vallascas

Francesco Vallascas

Durham University

Fabrizio Crespi

Universita di Cagliari

Jens Hagendorff

University of Edinburgh - Business School

Date Written: December 18, 2012

Abstract

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

Vallascas, Francesco and Crespi, Fabrizio and Hagendorff, Jens, Income Diversification and Bank Performance During the Financial Crisis (December 18, 2012). Available at SSRN: https://ssrn.com/abstract=1793232 or http://dx.doi.org/10.2139/ssrn.1793232

Francesco Vallascas

Durham University ( email )

Mill Hill Lane
Durham, DH1 3LB
United Kingdom

Fabrizio Crespi

Universita di Cagliari ( email )

Cagliari, 09124
Italy

Jens Hagendorff (Contact Author)

University of Edinburgh - Business School ( email )

University of Edinburgh
29 Buccleuch Place
Edinburgh, Scotland EH8 9JS
UNITED KINGDOM

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