Diversification, efficiency and risk of banks: New consolidating evidence from emerging economies

Bang Jeon, Ji Wu, Limei Chen () and Minghua Chen
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Limei Chen: Fudan University

No 2020-10, School of Economics Working Paper Series from LeBow College of Business, Drexel University

Abstract: This paper examines the impact of business diversification of banks on their risk, with efficiency taken into consideration as a conduit. Using bank-level data from more than 1400 commercial banks in 39 emerging economies during 2000-2016, we find that increased business diversification exerts two competing effects on bank risk, and overall reduces bank risk. The direct effect of increased diversification bolsters the stability of banks, but it is offset partially by the indirect effect whereby lowered efficiency, which is resulted from higher diversification, increases the riskiness of banks. This provides a consolidating evidence on the competing arguments on the diversification-efficiency nexus in the banking literature-the "diversification-premium" argument vs. the "diversification-discount" argument-with its extended implications on bank risk. In addition, we also present evidence that the diversification-bank risk nexus is heterogeneous on the bank size, market power and the ownership of banks, which provides useful policy implications for diversification strategies by bank managers as well as for the effective surveillance by bank regulators.

Keywords: Diversification; Bank Efficiency; Bank Risk-Taking; Emerging Economies (search for similar items in EconPapers)
JEL-codes: G15 G21 L25 (search for similar items in EconPapers)
Pages: 65 pages
Date: 2020-08-01
New Economics Papers: this item is included in nep-ban, nep-cse and nep-eff
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Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:ris:drxlwp:2020_010

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