The effect of revenue diversification on bank profitability and risk during the COVID-19 pandemic

Abstract

Banks can potentially reduce the variability of their revenue by diversifying beyond traditional lending activities into noninterest revenue sources. We investigate the effect of the COVID-19 pandemic on the relation between the use of noninterest income and bank profit and risk. The economic effect of the pandemic resulted in tightened credit standards and reduced demand for many types of loans. We find that noninterest revenue sources are positively related to performance but inversely related to risk. These results are consistent with a beneficial diversification effect during the pandemic from banks expanding beyond traditional lending sources of revenue.