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Is bank diversification a linking channel between regulatory capital and bank value?

Pilar Velasco

The British Accounting Review, 2022, vol. 54, issue 4

Abstract: This study investigates the interrelationship between bank regulatory capital and bank diversification. We argue that regulatory capital might act as a substitutive mechanism of diversification to alleviate a bank's default risk. As a result, regulatory capital is likely to discourage firms from excessive diversification, which might in turn indirectly improve bank value. Using a sample of listed banks in developed countries from 2011 to 2017, we find that total regulatory capital is inversely associated with bank diversification. Narrower regulatory capital ratios only have a significant association with income-based but not with asset-based diversification. Our results also reveal an indirect effect of regulatory capital on bank value mediated by bank diversification (i.e. indirect-only mediation). Overall, our study provides novel insights into the complementarity of the institutional and strategic domains so as to understand the far-reaching implications of regulation reforms for the strategic behaviour of banking companies.

Keywords: Corporate diversification; Banking industry; Regulatory capital; Mediation effect; Firm value (search for similar items in EconPapers)
JEL-codes: C23 D22 G21 G32 L25 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:bracre:v:54:y:2022:i:4:s0890838921000962

DOI: 10.1016/j.bar.2021.101070

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