How Does Diversification Impact Bank Stability? The Role of Globalization, Regulations, and Governance Environments

Abstract

AbstractThis paper examines the impact of bank diversification on stability, using bank‐level data for 22 Asian countries over the period from 1995 to 2009. We empirically investigate whether country characteristics, economic structure, regulatory and governance environments, and globalization have affected the degree of banking stability in Asia. This study takes on two measures for banking diversification ‐ asset and income diversities ‐ and adopts a broad set of variables as a proxy for bank stability. We apply dynamic panel data techniques and show different results from the U.S. and Europe. Our results first reveal that in Asia asset diversity is not sufficient enough to improve bank stability. However, bank stability can be enhanced through a strategy of income diversity. Second, a higher degree of globalization decreases bank stability through income diversity, but stability rises through asset diversity. Third, a country with a higher level of corporate governance reduces the agency problem, thus further increasing stability through diversity. Finally, a country with a higher level of economic development will support asset diversity so that banks can obtain higher profit accompanied by lower risk.