Diversification, Efficiency and Risk of Banks: New Consolidating Evidence From Emerging Economies

HKIMR Working Paper No.14/2020

66 Pages Posted: 7 Dec 2020

See all articles by Bang Nam Jeon

Bang Nam Jeon

Drexel University - Department of Economics & International Business; Drexel University-School of Economics

Ji Wu

Pennsylvania State University Harrisburg; Southwestern University of Finance and Economics (SWUFE) - Research Institute of Economics & Management

Limei Chen

Fudan University - School of Management

Minghua Chen

affiliation not provided to SSRN

Date Written: September 2020

Abstract

This paper examines the impact of business diversification of banks on their risk, with efficiency taken into consideration as a conduit. Using bank-level data from more than 1400 commercial banks in 39 emerging economies during 2000-2016, we find that increased business diversification exerts two competing effects on bank risk, and overall reduces bank risk. The direct effect of increased diversification bolsters the stability of banks, but this is offset partially by the indirect effect of lowered efficiency, which increases the riskiness of banks. This provides a consolidating evidence on the competing arguments on the diversification-efficiency nexus in banking — the “diversification-premium” argument vs. the “diversification-discount” argument — with its extended implications on bank risk. In addition, we also present evidence that the diversification-bank risk nexus is heterogeneous on the bank size, market power and the ownership of banks, which provides useful policy implications for diversification strategies by bank managers as well as for the effective surveillance by bank regulators.

Keywords: Diversification, Bank Efficiency; Bank Risk-taking; Emerging Economies

JEL Classification: G21; G15; L25

Suggested Citation

Jeon, Bang Nam and Wu, Ji and Wu, Ji and Chen, Limei and Chen, Minghua, Diversification, Efficiency and Risk of Banks: New Consolidating Evidence From Emerging Economies (September 2020). HKIMR Working Paper No.14/2020, Available at SSRN: https://ssrn.com/abstract=3711150 or http://dx.doi.org/10.2139/ssrn.3711150

Bang Nam Jeon (Contact Author)

Drexel University - Department of Economics & International Business ( email )

3141 Chestnut St.
Philadelphia, PA 19104
United States

Drexel University-School of Economics ( email )

3141 Chestnut St.
Philadelphia, PA 19104
United States

Ji Wu

Pennsylvania State University Harrisburg ( email )

777 West Harrisburg Pike
Middletown, PA 17057
United States

Southwestern University of Finance and Economics (SWUFE) - Research Institute of Economics & Management ( email )

55 Guanghuacun St
Chengdu, Sichuan 610074
China

Limei Chen

Fudan University - School of Management ( email )

No. 670, Guoshun Road
No.670 Guoshun Road
Shanghai, 200433
China

Minghua Chen

affiliation not provided to SSRN

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
44
Abstract Views
220
PlumX Metrics