Product Diversification in the European Banking Industry: Risk and Loan Pricing Implications

34 Pages Posted: 3 Jan 2006 Last revised: 14 Mar 2014

See all articles by Laetitia Lepetit

Laetitia Lepetit

University of Limoges - Laboratoire d'Analyse et de Prospectives Économiques (LAPE)

Emmanuelle Nys

Université de Limoges, LAPE

Philippe Rous

Université de Limoges, LAPE

Amine Tarazi

University of Limoges - Faculty of Law and Economic Science

Date Written: December 1, 2005

Abstract

The purpose of this paper is to investigate the relationship between bank risk and product diversification in the changing structure of the European banking industry. Based on a broad set of European banks for the period 1996-2002, our study shows that banks expanding into non-interest income activities present higher risk than banks which mainly supply loans. Whereas previous studies (mainly on U.S. banks) focused on portfolio diversification effects we explore risk implications of cross-selling determinants of loan pricing as an alternative explanation. Our results show that higher income from other activities is associated with lower lending rates which suggests that banks may actually use loans as a loss leader altering default screening and monitoring activities and consequently risk pricing.

Keywords: bank risk, interest income, non-interest income, product diversification

JEL Classification: G21

Suggested Citation

Lepetit, Laetitia and Nys, Emmanuelle and Rous, Philippe and Tarazi, Amine, Product Diversification in the European Banking Industry: Risk and Loan Pricing Implications (December 1, 2005). Available at SSRN: https://ssrn.com/abstract=873490 or http://dx.doi.org/10.2139/ssrn.873490

Laetitia Lepetit

University of Limoges - Laboratoire d'Analyse et de Prospectives Économiques (LAPE) ( email )

5 rue Felix Eboue
BP 3127
Limoges Cedex 1, 87031
France
+33555149213 (Phone)

HOME PAGE: http://www.unilim.fr/lape/

Emmanuelle Nys

Université de Limoges, LAPE ( email )

5 rue Félix Eboué
BP 3127
Limoges Cedex 1, 87031
France

Philippe Rous

Université de Limoges, LAPE ( email )

5 rue Félix Eboué BP3127
LIMOGES, 87031
France

Amine Tarazi (Contact Author)

University of Limoges - Faculty of Law and Economic Science ( email )

5 rue Felix Eboue
Limoges, 87000
France

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