Bank Diversification Research Articles

Organizational Resilience and Performance: An Analysis of the Relevance of Suppliers’ Trade Credit and Bank Diversification in the Spanish Construction Industry

The objective of this study is to determine the effect of relevant variables related to strategic sources of financial resources—in our case, suppliers’ trade credit and use of financial institutions—over performance among Spanish construction firms. To test the proposed hypotheses, we employ panel-data techniques on a large dataset that includes information for 3590 Spanish small (1723), medium-sized (1616) and large (251) construction businesses during 2004-2011. The results of the longitudinal analysis reveal that trade credit granted by suppliers constitute a relevant source of liquidity and financial resources that positively impacts economic performance. During the period of economic downturn that affected Spain after 2008, those construction firms that benefited from longer average payment periods from their suppliers reported superior performance levels. Additionally, we find that bank diversification is conducive to performance but only during the crisis period: performance is significantly higher in businesses that work with a greater number of financial institutions.

Determinants and Consequences of Non-Interest Income Diversification of Commercial Banks in OECD Countries

This paper studies determinants and consequences of the changing income structure of commercial banks in the era of financial conglomeration. Utilizing a dataset of 662 relatively large commercial banks in 29 OECD countries from 1992 to 2006, we find that banks with relatively large asset sizes, low net interest margins, high impaired loan ratios, and high cost-income ratios tend to exhibit higher non-interest income shares. As for macroeconomic factors, banks in countries with slow economic growth, a stable inflation environment, and well- developed stock markets tend to show higher non-interest income shares. Second, we investigate the consequences of non-interest income expansion on bank profitability and risks. While the positive effects on profit and capital adequacy seem to become weaker under the consideration of macroeconomic factors and endogeneity problems, the adverse impact on profit variability remains robust. Overall, these findings suggest that expanding toward non-interest income may not produce desired income diversification effects, and it does not necessarily imply a shift toward superior return-risk frontiers.

U.S. Banking Deregulation and Emerging Market Loans: Potential Links and Evidence, 1984~2005

How did the deregulation of U.S. bank activities affect the patterns of cross-border lending to emerging economies? Unlike bank lending from Europe or Japan, U.S. bank lending to emerging economies exhibited increasing volatility over time. Using U.S. cross-border bank exposure data, this study identifies a temporal association between important deregulation initiatives and the volatility of U.S. bank emerging market lending. This association is explained by the linkages between an important outcome of bank deregulation－earnings volatility from diversified bank activities－and the rising volatility. Together, it argues that U.S. banking deregulation had unanticipated effects of exacerbating the volatility of bank lending to emerging economies.

Effect of Bank Diversification on the Financial Distress of Commercial Banks Listed at the Nairobi Securities Exchange, Kenya

Due to the dynamic environment, banks are always striving to achieve a competitive advantage. In this sense, they have identified different strategies for diversification in order to survive. The purpose of this study was to determine the effect of bank diversification on financial distress of commercial banks listed in the Nairobi Securities Exchange. The specific objective of the study was to determine the effect of geographical and asset base diversification on the financial distress of the listed commercial banks in the NSE. The theories that guided this study included market power theory, resource dependency theory and resource based view theory. Exploratory research design was used. The research targeted ten listed commercial banks in the NSE. This study used panel data of a ten years period (2006-2015) from the audited and published financial statements of commercial banks. Descriptive and inferential statistics was employed for data analysis. This study established that geographical diversification was positively and significantly correlated with financial distress (b=0.0065; p<0.05). The finding also showed that assets base diversification was positively and significantly correlated with financial distress (b=0.0079; p<0.05). This study will contribute new dimensions and perspectives to generate policy solutions to the management and the banking industry stakeholders. The new empirical evidence will form the basis for further studies with the aim of addressing financial distress through diversification. The study recommends that banks should adopt a moderate geographical strategy of diversification to enhance financial health of the banks.

Bank diversification and monetary policy

ABSTRACTUsing bank-level data in Asia, we examine the relationship between the effectiveness of monetary policy and the business diversification of banks. We find that bank diversification enhances the effect of monetary policy.

Do multinational banks create or destroy shareholder value? A cross‐country analysis

AbstractWe question whether the international diversification of multinational banks creates or destroys shareholder value. Based on a sample of 384 listed banks from 56 countries we provide new and robust evidence that bank cross‐border activities create shareholder value, as shown by an economically and statistically significant premium for international diversification. Our results are confirmed controlling for bank fixed effects, time‐varying bank characteristics, reverse causality, functional diversification, and instrumenting for the choice to expand abroad. The increase in shareholder value is slightly larger for banks in the middle range of international diversification and in the case of expansion towards less developed countries.

SUSTAINABILITY AND GREEN BANKING PRACTICES: UNDERSTANDING THE STRATEGIC CONVERGENCE IN NEPALESE BANKS-SEM APPROACH

ABSTRACT Banking industry is never considered as a polluting industry, however, the present scale of banking operations has considerably increased the carbon footprint of banks due to their massive use of energy, high paper wastage, lack of green building, green project investment etc. To aid the reduction of external carbon emission, banks should finance green technology and pollution reducing projects. The banks operation should be emphasized on green banking activities conducted in such area and in such a manner that helps the overall reduction of external carbon emission and internal carbon footprint. Therefore, banks should adopt technology, process and products which result in sustainable reduction of their carbon footprint as well as develop a sustainable business. Green banking as a concept is proactive and smart way of thinking with a vision for future sustainability of our only spaceship earth. The major objective of this study was to understand the relationship between green banking and sustainability of Nepalese banks. The factors of green banking considered were green product/services, risk management, green investment, green banking strategies and green human resource management. This study undertakes quantitative approach towards descriptive and causal research design. SEM analysis was adopted to examine the hypotheses. A sample of 350 employees were considered for the study. However, 309 questionnaires were returned and used in this research. The study’s findings indicated that all the dimensions of green baking practices have significant relationship with sustainability of banks in Nepal. Thus, offering environmentally products that combine social concern along with encouraging projects. This takes care of sustainability and use of renewable resources and focusing on green investment by keeping the annual targets, strategic plan and budget at the relevant activities helps in sustainability of Nepalese banks. It is concluded that Nepalese banking organizations has a huge potential for the green banking practices. If these banks turn their focus toward the sustainability, it would be beneficial for the risk diversification of banks as well as development of the country. So, it can be concluded that green banking helps in sustainability of banks. Keywords Green Banking, Nepalese Banks, Sustainability, Banking Industry, Green Banks

Determinants of income diversification: evidence from Chinese banks

ABSTRACTThis article presents an analysis of the determinants of Chinese commercial banks’ income diversification decisions. Using a panel dataset comprising 88 Chinese domestic banks from 2003 to 2010, we find that bank diversification reflects a variety of managerial abilities: insolvency risks, cost, capital position, asset scale and ownership structure. A larger ratio of banking assets to gross domestic product and lower interest spread lead to a higher level of diversification. Moreover, national banks and regional banks have different strategic responses to the macroeconomic, and indeed, regulatory environment. Resisting shocks from the banking sector and the macro economy, and supplementing liquidity shortages from intermediation business seem to be the driving forces of national banks to operate in non-banking sectors.

Are concentrated banks better informed than diversified ones?

This paper discusses evidence that large, diversified banks lend using `hard' information measures, such as audited financial statements. Structural changes toward larger and more diversified banks may have left some segments of credit markets - those depending on investment in `soft' information - under-served. These trends accelerated following the Financial Crisis. At the same time, bank lending to small businesses, which typically can only supply soft information, has been slow to recover from the Crisis. These trends are worrying because entry of focused banks, the normal market mechanism to counteract such a trend, has been absent since the Crisis.

What drives bank efficiency? The interaction of bank income diversification and ownership

This paper examines the relation between income diversification and bank efficiency across 83 countries over the period 2003–2012. We also evaluate how ownership structure affects the impact of bank diversification on cost efficiency. Using a stochastic frontier approach to estimate bank cost efficiency, we find evidence that increased diversification tends to improve bank efficiency but the benefits of diversification are offset by the increased exposure to volatile non-interest activities. With respect to the impact of ownership, we find that state-owned banks with fewer volatile income sources are likely to be less efficient in terms of income diversification. Our results also reveal that more diversified foreign-owned banks tend to be less efficient in developed countries, while the increased foreign ownership of banks appears to improve the diversification benefits in developing countries after the financial crisis. Our findings highlight the implications of bank income diversification and ownership for efficiency and are relevant to bank regulators who are considering additional regulations on bank management.

VAR and Stress Tests: The Impact of Fat-Tail Risk and Systemic Risk on Commercial Banks in Hong Kong and China

This study shows that the statistical property of the commercial banks’ rate of returns can be used to explain the resistance to using Value-at-risk (VaR) and stress tests to determine banks’ capital adequacy. We showed that “fat-tail” risk requires more capital than the “normal tail” risk estimated by VaR, which assumes normal distribution. The puzzle that most banks in Europe and Asia maintained higher capital levels than required by regulators before the 2008 financial crisis can be reinterpreted as rational action to protect financial companies against abnormal fat-tail risk, which may reflect inside information, such as off-balance sheet activities, rather than regulations. Micro- and macro-prudential policies are needed not only to discourage fat-tail risk seeking, but also to cover the higher social costs caused by higher systemic risk and bank diversification, which are affected by the heaviness of the tail and limited liability of bank charter.

Determinants of bank margins in a dual banking system

PurposeThe purpose of this paper is to determine of bank margins for conventional and Islamic banks in the dual banking system in Malaysia.Design/methodology/approachThe study uses unbalanced panel data for 20 conventional banks and 16 Islamic banks over the period 2008-2014. The dynamic two-step GMM estimator technique introduced by Arellano and Bond (1991) is applied.FindingsThe results suggest that there are significant similarities with minor differences in terms of factors determining bank margins between conventional and Islamic banks in Malaysia. The margins for conventional banks are influenced by operating costs, efficiency, credit risk, degree of risk aversion, market share, size of operation, implicit interest payments and funding costs. For Islamic banks, the margin determinants are found to be operating costs, efficiency, credit risk, market share and implicit interest payments. This means that more factors influence the margins in conventional banks compared to Islamic banks. Although bank diversification activities have increased in recent years, their impact on bank margins is minimal.Practical implicationsThe results suggest that improving operational costs, operational efficiency and credit risk management, and minimising implicit interest payments would be the best strategy to enhance the bank margins for both conventional and Islamic banks. The results also have important policy implications on the necessity to expand the size of Islamic banking in Malaysia.Originality/valueThere are relatively few studies concerning determinants of bank margins in emerging markets. The present study adds to the literature by presenting evidence from Malaysia, an emerging market with a dual banking system. This allows us to explore the similarities and differences between conventional and Islamic banks in Malaysia in respect of determinants of the margins.

How does the stock market value bank diversification? Evidence from Vietnam

Even though commercial banks have gradually followed the diversification strategy and deeply penetrated into non-traditional businesses for further income sources, studies on potential diversification benefits provide mixed results. This paper investigates how stock market values bank diversification using a data set of Vietnamese listed banks for the period 2006–2014. Overall, we find a negative relationship between bank diversification and stock market valuation. This implies investor preference for banks focusing on traditional activities.

Diversification in Korean Banking Business: Is Noninterest Income a Financial Savior?

This paper examines whether the diversification of operating income in Korean banks has persistently enhanced the performance of Korean banks. The results show that, despite Korean banks’ efforts to diversify their operating income, these banks do not gain any benefit from the diversification. Thus, bank managers in Korea focus on interest income revenue. The results also show that the increase in non-interest income revenue keeps pace with the growth in expenses, which offsets the diversification effect on the performance of Korean banks. As a result, Korean banks discourage banking diversification and focus on non-interest income revenues.

Analysis of Determinants of Profitability of Commercial Banks in Botswana

This study had dual purposes: (1) to examine relationship between profitability and internal and external factors of commercial banks in Botswana and (2) to perform trend analysis of factors indicating banks’ performance. The study analysed the secondary data obtained from Bank of Botswana reports. Profitability measures were return on assets (ROA), return on equity (ROE) and net interest income (NIM) as dependent variables. The independent variables comprised internal factors: bank liquidity, capital adequacy, credit risk, bank size, market profit opportunity, cost efficiency, and bank diversification as well as the external factors: economic growth, inflation and bank interest. We utilised regression technique to analyse the relationship between bank performance and internal and external variables presented in 3 models: ROA, ROE and NIM. The results suggest that ROE is the best measure of the bank profitability followed by ROA and NIM. The combination of inflation, cost efficiency, bank liquidity, credit risk, market profit opportunity and bank diversification was the best predictor of bank profitability as represented by ROE. The implications drawn from this study are that banks should match their operating expenses with revenue growth, and try to strike a balance between asset, liquidity, and liability management in order to remain competitive and earn higher profits. As for the regulator, effective controls should be placed on deposit rates, bank charges, inflation and banks rates.

Financial Deregulation, Mergers and Acquisitions and Bank Risk Taking

This paper intends to evaluate the impact of financial deregulation of US before 2008 through how the risks associated with mergers and acquisitions (M&As) affect banks’ levels of solvency. This paper is the first that hypothesizes bank solvency to be affected by M&As directly and indirectly through banks’ market risk, geographical diversification, and activity diversification. Accordingly, the relationship between bank solvency, diversification, and market risk are estimated as a system using the Generalized Method of Moments (GMM). The key finding is that M&As erode banks’ solvency, both directly and indirectly through the effects associated with their geographical diversification. Financial deregulation contributes to banks’ risk taking.

Determinants of Profitability, Risk, and Efficiency for Korean and Chinese Banks

This paper investigates the determinants of profitability, risk, and efficiency for Korean and Chinese commercial banks. To conduct the empirical analysis, this study selects five nation-wide banks and six local banks in Korea, and five state-owned banks and eight joint-equity banks in China. The main regression results are as follows: First, this study finds that the important internal determinants for Korean and Chinese commercial banks are operational efficiency, management efficiency measured by overhead expenses, and operating income. GDP is the most significant external determinant. Second, the profitability of Korean banks is increased because of capital strength and operating income. For Chinese banks, operational efficiency and operating income are important determinants of profitability. Third, the risk of Korean banks is increased by bank diversification; but, for Chinese banks, the loan-deposit ratio increases banks’ risk. Fourth, for Korean banks, bank size has a positive influence on efficiency, while for Chinese banks liquidity and capital strength have a positive impact on efficiency. In conclusion, both Korean and Chinese banks have common and different determinants of profitability, risk and efficiency depending on their specific situation. This study is preliminary tests for Korean banks on how to team up with Chinese banks to expand markets and earn profits. Furthermore, forward-looking efforts should be made to strengthen Korean banks’ influence in global market based on this results.

Diversification Effects on the Banks’ Return and Risk

This article analyses the diversification effects on the exchange listed EU banks’ risk-return framework. Second banking directive of 1989 has initiated the boom of activity diversification in Europe. The empirical results indicated to the statistically significant diversification premium on the banks’ performance, using the non-interest income share, together with its quadratic term, as indicator of banking diversification. The same holds for the banks with the diversified assets. In terms of revenue diversification, diversified banks are less profitable. Due to the statistically insignificant outcomes, in case of total and bank-specific risk analysis, it is difficult to make an implicit conclusion, how the diversification decision affects those types of risk. But, in terms of systematic risk there is strong statistical evidence that more diversified banks are exposed to higher levels of market risk. As a result, for the sample of European banks, the positive risk-return trade-off was not found.

The impacts of risk-taking behaviour and competition on technical efficiency: Evidence from the Chinese banking industry

This paper tests the impact of risk and competition on efficiency in the Chinese banking industry over the period 2003–2013. Comprehensive types of risk-taking behaviour are considered including credit risk, liquidity risk, capital risk, and insolvency risk. Competition is measured by the Lerner index. The results are cross-checked using an alternative econometric technique as well as an alternative competition indicator. The findings show that the technical and pure technical efficiencies of Chinese commercial banks are significantly and negatively affected by liquidity risk. They further show that greater competition precedes declines in technical and pure technical efficiencies of Chinese commercial banks. The results suggest that Chinese bank efficiency is significantly affected by bank diversification, banking sector development, stock market development, inflation and GDP growth rate. The findings also indicate that, compared to state-owned commercial banks, joint-stock commercial banks and city commercial banks have lower technical and pure technical efficiencies.

Valuation of diversified banks: New evidence

This paper reconsiders the effect of diversification on bank valuation. Our objective is to provide new evidence based on a unified estimation framework that places particular emphasis on separating the effects of diversification (specialised banks vs. diversified banks) from those of bank type (investment banks vs. commercial banks). Consistent with prior studies, we find a significant diversification discount at the end of the 1990s. Our main finding is that it decreases over time and practically vanishes after the financial crisis. We do not find support for the hypothesis that the diversification effect is influenced by geographical or regulatory factors. The valuation impact of bank characteristics varies over time, particularly in the financial crisis, but this structural break does not explain the observed decrease of the diversification discount. We show that the pre-crisis discount is considerably smaller in a robust regression, which in part is driven by banks with a large share of non-interest income.