Competition and diversification in the European Banking Sector

Abstract

This paper provides new insights into the relationship between competition and diversification based on a sample of 1,570 commercial banks located in 28 European Union member states over the period of 2000 through 2016. The adjusted Lerner index and income diversification are the main indicators that account for bank-level competition and non-traditional activities. As robustness checks, we used Boone indicator along with diversification that was measured by the share of off-balance sheet items in total assets. We ran the estimations using multilevel analysis at country- and bank-level. Overall, competition stimulates bank diversification as financial institutions are continuously searching for additional sources of income to finance their competitive strategies. Bank performance, efficiency and R&D expenditure have positive effects on diversification. Opposite impacts characterize the market capitalization of listed domestic companies and GDP growth.