Income diversification, bank stability and owners identity: international evidence from emerging economies

Abstract

This paper examines how ownership structure affects the relationship between income diversification and bank stability in emerging markets. Examining data on more than 171 banks from 13 Middle East and North Africa countries examined over the 2006-2012 period, the impact of foreign and state ownership on income diversification and bank stability is jointly studied by a 3SLS model. The main finding is that diversification, across interest and non-interest activities and non-traditional banking activities, increases bank stability. State-owned banks seem to take more risk by diversifying less their income. Inversely, foreign ownership decreases risk by diversifying their income. The findings have significant strategic implications for bank managers, regulators and investors who share a common interest in boosting bank stability.