Do Community Banks Benefit from Diversification?

Posted: 5 Aug 2004

See all articles by Kevin J. Stiroh

Kevin J. Stiroh

Federal Reserve Bank of New York

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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. In particular, an increased focus on noninterest income-generating activities is associated with declines in risk-adjusted performance, as are commercial and industrial 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, performance, diversification

Suggested Citation

Stiroh, Kevin J., Do Community Banks Benefit from Diversification?. Journal of Financial Services Research, Vol. 25, No. 2 & 3, April/June 2004. Available at SSRN:

Kevin J. Stiroh (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
(212) 720-6633 (Phone)
(212) 720-8363 (Fax)

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