Abstract
We investigate how diversification affects the U.S. bank holding companies’ funding cost. We document consistent evidence of a lower deposit rates for banks that engage more in non-traditional banking activities. The quantile regressions which dissect the behaviour of banks at the right tail of deposits costs distribution, point out the leveraged effect of diversification is more pronounced with lower-deposits costs banks. The study also suggests diversified banks enjoy lower funding cost during the crisis. Our study is of interest to regulators and policymakers.
Highlights
The decision to expand into non-traditional banking activities and its impact to bank riskiness is well documented over the two past decades, especially in the aftermath of the global financial crisis where many blame the deregulation that facilitates casino-style gambling on Wall Street and allows banks to involve into highly volatile and complex non-bank activities such as trading and market making
We perform multivariate analyses to examine how diversification affects bank funding cost after controlling other control variables documented in prior literature
We investigate the impacts of the diversification on bank funding cost using a large sample of U.S banks during the period of 2000 to 2017
Summary
The decision to expand into non-traditional banking activities and its impact to bank riskiness is well documented over the two past decades, especially in the aftermath of the global financial crisis where many blame the deregulation that facilitates casino-style gambling on Wall Street and allows banks to involve into highly volatile and complex non-bank activities such as trading and market making. Debate, and propose a new empirical investigation on the effect of diversification on bank risk under the perspective of its funding cost This question is important, since the funding cost of banks in some extent can reflect the financial health of banks, and affect the bank’s investment decisions. Another concern related to diversification is the intensified agency problems since functional diversification can increase bank’s size as well as bank’s opaqueness, leading to discretionary decisions to undertake value-decreasing investments (Berger & Ofek, 1995; Goetz, Laeven, & Levine, 2013) These arguments suggest that banks that move toward non-traditional banking activities may experience higher risks, higher funding cost. Having shown the evidence of lower funding cost for banks that engage more in non-traditional banking activities, we provide further investigation by examining the effects of the global financial crisis on the association between diversification and funding cost. Our evidence of lower funding cost of diversified banks, especially during the crisis, emphasises the bright side of diversification, casts doubt on these initiatives
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