Diversification, Bank Risk and Performance: A Cross-Country Comparison

Abstract

The purpose of this paper is to continue the discussion regarding the diversification of both banking activities and geographical diversification as it relates to performance and risk. Herfindahl indices are used to measure diversification and a number of risk and performance measures are tested including Tobin's q, annualized stock returns and total risk. The results suggest the type of diversification can have varying impacts on both performance and risk. Specifically, banks focused in their revenue activities have higher levels of q than those diversifying their activities. Banks which are more geographically focused, however, have lower annualized stock returns. Banks with an activity focus or those who are geographically diversified also experience higher relative levels of risk. These results have potential implications for bank managers, shareholders and monitors/regulators.