Bank Income Diversification, Asset Correlation and Systemic Risk

Abstract

This paper explores whether the asset correlations among the non‐interest activities of banks are the key causes for enhancing the bank diversification‐systemic risk nexus. Our empirical evidence indicates that banks' income diversification significantly raises systemic risk. After removing those banks with high asset correlations, the effect of individual banks' diversification on banking systemic risk turns insignificant or even inverse. The results show that high asset correlations among banks could introduce bank failures, thereby leading to higher systemic risk in the financial sector.

The interrelationships between bank risk and market discipline in Southeast Asia

“…For example, several studies have investigated whether bank risk is affected by corporate governance mechanisms such as board diversity (Arango and Gaitan, 2021; Abou-El-Sood, 2021; Kinateder et al , 2021). Some studies have looked at the impact of bank strategies such as geographic diversification (Le et al , 2020; Le et al , 2019) and income diversification (Lee et al , 2020) or foreign ownership (Lee and Hsieh, 2014; Le, 2021).…”

Business Diversification and Banks’ Performance: The Moderating Role of Credit and Liquidity Risk (Empirical Study)

“…Nevertheless, the empirical findings in the literature do not reach a consensus about the impact of business diversification on banks' risks or performance. For instance, some studies indicated that business diversification positively affects banks' risks and performance (e.g., Ferreira et al, 2019); Lee et al, 2020;Uddin et al, 2021;Addai et al, 2022;Alouane et al, 2022;Antao and Karnik, 2022). On the other hand, Business Diversification and Banks' Performance: The Moderating Role of Credit and Liquidity Risk (Empirical Study)…”

A comparative analysis of capital, risk, efficiency, profitability, diversification and integration of the Eurozone and the United States banking institutions in the aftermath of the global financial crisis

“…Bank-Specific Indicators In our model we control for the bank characteristics that may affect the impact of bank diversification on capital, risk, efficiency and profitability. Consistent with the prior literature (Abuzayed et al,(2018), Paltrinieri et al (2020), Moudud-Ul-Huq et al, (2019), Meng et al, (2017), Luu et al, (2019) and Lee et al, (2019)), we account for the bank-specific indicators: size, liquidity, intermediation ratio and lending specialization.…”

“…However, Ferreira et al, (2018) assess a sample of Brazilian banks and find evidence that revenue diversification is directly connected with risk and positively, but insignificantly, connected with performance. Also, Lee et al, (2019) examine the effect of asset correlation on the relationship between income diversification and risk and their findings indicate that although the relationship is positive, it could be inverted because of asset correlation.…”

“…Finally, the effect of diversifying non-credit banking activities is also estimated in the established literature (Sissy et al, (2017), Minh and Thanh, (2019), Ghosh, (2019), Lee et al, (2019), Moudud-Ul-Huq et al,(2020) and Edirisuriya et al, (2015)). We measure non-interest income diversification (DIVNI) by employing the same pattern that is, Adjusted Herfindahl Hirschman Indices (AHHI).…”