Australian Specific Bank Features and the Impact of Income Diversification on Bank Performance and Risk

Abstract

Since financial market deregulation, Australian banks have significantly diversified from a dependence on simple products such as interest‐bearing loans to a broader range of financial products services. Such initiatives have transformed the structure of the Australian banking industry and are destined to receive scrutiny following the announcement of Australia's financial services inquiry. Against the common view that attempts by firms to diversify can be expected to impact negatively on financial performance, we find no strong evidence to suggest that diversification has been unfavourable to the performance of Australian banks. We find rather that Australia's banks have improved their risk‐return profiles as an outcome of diversification.