Do Community Banks Benefit from Diversification?
36 Pages Posted: 3 Jan 2004
Date Written: December 18, 2002
This paper examines the link between diversification and risk-adjusted performance for small, community banks. The results show diversification benefits within broad activity classes, but not between them. Specific business lines are linked with very different ex post outcomes, however, so the mix of activities is also important. Increased focus on noninterest income-generating activities is associated with declines in risk-adjusted performance, as are commercial and industrial lending, consumer lending, and trading. This is a potential dark side of the search to diversify as managers may enter businesses where they have little experience or comparative advantage. A final set of results shows significant differences in the determinants of risk-adjusted performance for community banks relative to larger banks, which suggests that a competitive opportunity remains for community banks.
Keywords: Community bank, diversification
JEL Classification: G21
Suggested Citation: Suggested Citation