Bank Diversification Strategies Under Market Competition

Abstract

This paper explores the impact of market competition on banks’ diversification strategies. Through a unique sample of Vietnamese commercial banks during 2007 to 2021, our most important finding is that the bank competition impact may depend on the specific type of diversification under analysis. Specifically, we document that banks are more likely to diversify their asset portfolios and income sources into non-lending activities and non-interest revenues amid high competition. In contrast, loan portfolios of banks facing more competition tend to be less diversified across different economic sectors. Besides, funding diversity in another vein may not react to changes in the banking market structure. Further empirical results reveal that the influence of market competition on bank business models is more pronounced at smaller and riskier banks, suggesting that a competitive market places greater pressure on more vulnerable banks and causes them to adopt a more aggressive diversification strategy. Based on these findings, critical policy implications include the development of frameworks to guide banks’ activity diversification strategies, monitoring sectoral concentration risks, and providing targeted support and guidance for specific groups of banks, particularly smaller and riskier institutions, within a competitive banking environment.