Geographic Income Diversification of Large European Banks: Better or Worse?

Abstract

This study examines the impact of geographic income diversification of large European banks on performance by using unique hand-collected European banking data. By dividing the total operating income into three regions as home country, the rest of Europe and the rest of the world, we find evidence that geographic income diversification reduces bank performance. Moreover, we separately analyze the net effects of shifting operations from home country to the rest of Europe and the rest of world income and find that they reduce the bank performance except for the banks that are already more concentrated in these regions. We also show that our results hold when we analyze with only two regions (domestic and foreign) and control the effect of board nationality diversity.

Keywords: Geographic income diversification, European banking, bank performance, board diversity

JEL Classification: G21, G34