Small European Banks: Benefits from Diversification?

Posted: 4 Dec 2006 Last revised: 19 Dec 2007

See all articles by Klaus Schaeck

Klaus Schaeck

University of Bristol

Simon Wolfe

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

Steve Mercieca

University of Southampton

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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

Schaeck, Klaus and Wolfe, Simon and Mercieca, Steve, Small European Banks: Benefits from Diversification?. Journal of Banking and Finance, Vol. 31, pp. 1975-1998. Available at SSRN: https://ssrn.com/abstract=949055

Klaus Schaeck

University of Bristol ( email )

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

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

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