The effect of revenue diversification on bank profitability and risk during the COVID-19 pandemic

Li, Xingjian; Feng, Hongrui; Zhao, Sebastian; Carter, David A.

doi:10.1016/j.frl.2021.101957

Cited by 102 publications

(102 citation statements)

References 19 publications

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“…The results are also in line with the results of Dadoukis et al, who indicates that larger banks and those who were better IT equipped in the pre-pandemic period during the first quarters of the pandemic, better maintained their market position, profitability, and financial stability [53]. Additionally, larger banks have more capacity to introduce non-interest services for diversification of income and improvement of profitability [54][55][56][57].…”

Section: Results Of Modelling and Discussionsupporting

confidence: 89%

The Impact of COVID-19 on Bank Equity and Performance: The Case of Central Eastern South European Countries

Kozak

2021

Sustainability

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The purpose of this article is to examine the impact of the shock increase, in the value of nonperforming loans, on the equity level and profitability of 141 banks in 18 countries of Central Eastern South Europe (CESE). This study is important for assessing the financial stability of banks in this region in the face of the continuing negative effects of the COVID-19 pandemic. Based on the annual data, as of the end of 2020, from the S&P Global database, stress tests were carried out to check what value of NPL growth, over the next year, will lead to breach the regulatory capital requirements in domestic sectors and in individual groups of banks. The results indicate that the banks in CESE were well capitalized and had the ability to maintain capital requirements with a 12% increase in nonperforming loans. The resilience of domestic banking sectors varies, and it is higher in non-EU countries. Smaller and non-public banks show a greater ability to preserve the appropriate level of equity, although there is a risk that they may postpone the time of provisioning credit risk and additionally increase lending to lower the NPL ratio. Larger banks are more profitable in times of crisis. The results of the research are important for assessing the stability of the banking sector in CESE during the crisis and can be used by financial supervision of the region’s countries and banking market analysts.

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Section: Results Of Modelling and Discussionsupporting

confidence: 89%

The Impact of COVID-19 on Bank Equity and Performance: The Case of Central Eastern South European Countries

Kozak

2021

Sustainability

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“…Other researchers have reported a positive relationship between ID and financial performance (Chiorazzo et al, 2008;Lin et al, 2021;Li et al, 2021).…”

Section: Income Diversification and Bank Stabilitymentioning

confidence: 88%

Bank maturity, income diversification, and bank stability

Tariq¹,

Usman

Tariq

et al. 2021

Journal of Business Economics and Management

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The purpose of this research is to examine the influence of bank life cycle or bank maturity on income diversification (ID) and stability. In addition, this research investigates the ID relationship with bank stability. Drawing on the dynamic resource-based view and modern portfolio theory, this research examines the influence of a paramount internal factor i.e. bank life cycle or bank maturity on income diversification (ID) and stability consequence. Data were collected from the Pakistani’s commercial banks’ financial statements over the period 2005 to 2019. This research relied on the fixed effect and generalized method of moments (GMM) model to empirically test the proposed relationships. Core findings of the research reveal that bank maturity leads to enhanced ID and ID strongly influences the bank stability consequence, moreover, research findings are robust to use different measures of bank stability and GMM estimation techniques. To the authors’ best knowledge, this research is the first to report specific evidence about bank maturity as an internal driver of income diversification and stability and advances the literature seeking to understand the determinants of ID. This research also shows managers to recognize the importance of internal drivers to diversify effectively into non-interest income, and how such an effective ID translates into stability consequence.

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“…Our findings are even more important during the COVID-19 pandemic. Recently, Li et al (2021) investigated the effect of the COVID-19 pandemic on bank performance and risk related to the use of non-interest revenue sources. Their findings suggest that non-interest revenue sources are positively related to bank performance but inversely related to risk.…”

Section: Introductionmentioning

confidence: 99%

Regulation, banking competition and risk-taking behavior in the MENA region: policy implications for Islamic banks

Mateev

Moudud‐Ul‐Huq

Sahyouni

2021

JIABR

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Purpose This paper aims to investigate the impact of regulation and market competition on the risk-taking Behaviour of financial institutions in the Middle East and North Africa (MENA) region. Design/methodology/approach The empirical framework is based on panel fixed effects/random effects specification. For robustness purpose, this study also uses the generalized method of moments estimation technique. This study tests the hypothesis that regulatory capital requirements have a significant effect on financial stability of Islamic and conventional banks (CBs) in the MENA region. This study also investigates the moderating effect of market power and concentration on the relationship between capital regulation and bank risk. Findings The estimation results support the view that capital adequacy ratio (CAR) has no significant impact on credit risk of Islamic banks (IBs), whereas market competition does play a significant role in shaping the risk behavior of these institutions. This study report opposite results for CBs – an increase in the minimum capital requirements is followed by an increase in a bank’s risk level, which has a negative impact on their financial stability. Furthermore, the results support the notion of a non-linear relationship between banking concentration and bank risk. The findings inform the regulatory authorities concerned with improving the financial stability of banking sector in the MENA region to set their policy differently depending on the level of concentration in the banking market. Research limitations/implications This study contributes to the literature on the effectiveness of regulatory reforms (in this case, capital requirements) and market competition for bank performance and risk-taking. In regard to IBs, capital requirements are less effective in requiring IBs to adjust their risk level according to the Basel III methodology. This study finds that IBs’ risk behavior is strongly associated with market competition, and therefore, the interest rates. Moreover, banks operating in markets with high banking concentration (but not necessarily, low competition), will decrease their credit risk level in response to an increase in the minimum capital requirements. As a result, these banks will be more stable compared to their conventional peers. Thus, regulators and policymakers in the MENA region should restrict the risk-taking behavior of IBs through stringent capital requirements and more intense banking supervision. Practical implications The practical implications of these findings are that the regulatory authorities concerned with improving banking sector stability in the MENA region should proceed differently, depending on the level of banking market concentration. The findings inform regulators and policymakers to set capital requirements at levels that would restrict banks from taking more risk to increase their returns. They are also important for bank managers who should avoid risky strategies in response to increased regulatory pressure (e.g. increase in the minimum required capital level of 8%), as they may lead to an increase in the level of non-performing loans, and therefore, a greater probability of bank default. A future extension of this study will focus on testing the effect of bank risk-taking and market competition on the capitalization levels of banks in the MENA countries. More specifically, this study will investigates if banks raise their capitalization levels during the COVID-19 pandemic. Originality/value The analysis of previous research indicates that there is no unambiguous answer to the question of whether IBs perform differently than CBs under different competitive conditions. To fill this gap, this study examines the influence of capital regulation and market competition (both individually and interactively) on bank risk-taking behavior using a large sample of banking institutions in 18 MENA countries over 14 years (2005–2018). For the first time in this line of research, this study shows that the level of market power is positively associated with the level of a bank’ insolvency risk. In others words, IBs operating in highly competitive markets are more inclined to take a higher risk than their conventional peers. Regarding the IBs credit risk behavior, this study finds that market power has a limited impact on the relationship between CAR and risk level. This means that IBs are still applying in their operations the theoretical models based on the prohibition of interest.

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The effect of revenue diversification on bank profitability and risk during the COVID-19 pandemic

Cited by 102 publications

References 19 publications

The Impact of COVID-19 on Bank Equity and Performance: The Case of Central Eastern South European Countries

The Impact of COVID-19 on Bank Equity and Performance: The Case of Central Eastern South European Countries

Bank maturity, income diversification, and bank stability

Regulation, banking competition and risk-taking behavior in the MENA region: policy implications for Islamic banks

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