Small European Banks: Benefits from Diversification?

31 Pages Posted: 4 Dec 2006

See all articles by Simon Wolfe

Simon Wolfe

University of Southampton - School of Management; University of Southampton - Southampton Business School

Steve Mercieca

University of Southampton

Klaus Schaeck

University of Bristol

Multiple version iconThere are 2 versions of this paper

Date Written: July 2006

Abstract

Motivated by the liberalisation and harmonisation of financial systems in Europe, we investigate whether the observed shift into non-interest income activities improves performance of small European credit institutions. Using a sample of 755 small banks for the period 1997-2003, we find no direct diversification benefits within and across business lines and an inverse association between non-interest income and bank performance. Our findings are robust to a set of sensitivity analyses using alternative samples and controlling for the regulatory environment. Furthermore, the results provide circumstantial evidence for the presence of economies of scale. The absence of benefits of diversification confirms findings for other banking markets and suggests small European banks enter lines of business where they currently lack expertise and experience. These results have implications for bank supervisors, regulators and bank managers.

Keywords: small banks, product diversification, risk/return performance

JEL Classification: G10, G21, G28

Suggested Citation

Wolfe, Simon and Mercieca, Steve and Schaeck, Klaus, Small European Banks: Benefits from Diversification? (July 2006). Available at SSRN: https://ssrn.com/abstract=949053 or http://dx.doi.org/10.2139/ssrn.949053

Simon Wolfe (Contact Author)

University of Southampton - School of Management ( email )

Highfield
Southampton S017 1BJ, Hampshire SO17 1BJ
United Kingdom

University of Southampton - Southampton Business School ( email )

Southampton, SO17 1BJ
United Kingdom

Steve Mercieca

University of Southampton ( email )

Highfield
Southampton
Hampshire, SO 17 1BJ
United Kingdom

Klaus Schaeck

University of Bristol ( email )

University of Bristol,
Senate House, Tyndall Avenue
Bristol, BS8 ITH
United Kingdom

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