Diversification by U.S. Banks: True Safety or a False Sense of Security?

52 Pages Posted: 2 Jul 2016 Last revised: 22 Jul 2017

See all articles by Priyank Gandhi

Priyank Gandhi

Rutgers Business School, Newark and New Brunswick

Patrick Christian Kiefer

University of California, Los Angeles (UCLA) - Anderson School of Management

Alberto Plazzi

Swiss Finance Institute; Universita' della Svizzera italiana

Date Written: July 18, 2017

Abstract

U.S. banks have increasingly diversified into activities traditionally considered as non-core for the banking sector. This paper investigates whether diversification influences banks’ investment (credit) policy and profitability. Diversified banks appear to benefit from “coinsurance,” supply more credit, and seem more profitable. However, diversification does not lead to real reductions in risk as its benefits are limited to “good” times. Diversified banks are more exposed to systematic risk and their credit supply is more sensitive to macroeconomic conditions, and monetary policy changes. Our study contributes to the current debate on the optimal scope of bank activities, and highlights novel channels through which diversification may impact banks’ credit supply and therefore the real economy.

Keywords: Bank diversification, Non-interest income, Systemic risk, Financial crisis

JEL Classification: G01, G21, G28

Suggested Citation

Gandhi, Priyank and Kiefer, Patrick Christian and Plazzi, Alberto, Diversification by U.S. Banks: True Safety or a False Sense of Security? (July 18, 2017). Swiss Finance Institute Research Paper No. 16-43, Available at SSRN: https://ssrn.com/abstract=2803181 or http://dx.doi.org/10.2139/ssrn.2803181

Priyank Gandhi (Contact Author)

Rutgers Business School, Newark and New Brunswick ( email )

111 Washington Avenue
Newark, NJ 07102
United States

Patrick Christian Kiefer

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Alberto Plazzi

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Universita' della Svizzera italiana ( email )

Via Buffi 13
CH-6900 Lugano
Switzerland

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