Diversification and Connection in Banking. First Findings

Abstract

On the issue of bank’s diversification literature usually refers to revenue mix, geographical markets and M&A deals. This paper aims to fill a gap by investigating diversification in terms of different business combinations (carrying out activities in different client front-end businesses). More in details, our research is exploring whether business diversification brings benefits to banks in terms of performance and stability at equity/shareholders level. We built a 92,747 half-year observations proprietary dataset with data at both divisional and corporate levels. The covered period is 2005-2013 and 2001-2013 for European and American banks, respectively. Retail banking, corporate banking, private banking, and investment banking are considered as the main business combinations which banks operate in. First findings are as follow. We discovered that the four business combinations are poorly correlated, as it is observable by the low correlation coefficients between variables pertaining to them. This shows the result of the diversification effort carried out by banks’ managers in the first decade of this century. Moreover, we found that financial crisis played a negligible role in altering results from diversification, only influenced the level of correlation in the fields of the cost of credit and operational costs structure. Further research will be carried out in order to understand the actual effects of business diversification on the overall bank’s performance in terms of both value results and their stability.

Keywords: diversification strategy, banking industry, equity/shareholders level performance, equity risk

JEL Classification: G20, G21, M21