Abstract
<p>This paper examines the effect of revenue diversification on bank performance and bank risk by studying 101 conventional commercial banks in Indonesia over the period of 2010-2014 resulting in 505 observations. By employing panel least square technique, our results show that revenue diversification negatively affects bank performance. Moreover, it is found that diversified banks are riskier than specialized banks. The risk is diminished when state-owned banks diversify their business. Joint venture banks are riskier than other banks when they engage in non-interest income activities.</p>
Highlights
Around the world, the banking industry has developed along with the development of technology and globalization
This study examines the effect of revenue diversification on bank performance and risk
We investigate which revenue sources contribute to bank performance and bank risk
Summary
The banking industry has developed along with the development of technology and globalization It started with traditional activities which are collecting funds from depositors and distributing it to borrowers. The shift from traditional activities to nontraditional activities has further started since the banking deregulation applied in many countries (e.g. cross-state ownership in the US, financial deregulation package of 88 in Indonesia). This has led the banking activities have been varied, collecting and granting funds and engage in trading activities, providing insurance, providing brokerage services, and other services. Non-interest revenue shows volatility but negatively correlated with risk-adjusted return. Small banks can get gains from the diversified source of income, while large banks are benefitted as it can cover higher operating cost after investment in new technology
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