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Is bank income diversification beneficial? Evidence from an emerging economy

Céline Meslier, Ruth Tacneng and Amine Tarazi

Journal of International Financial Markets, Institutions and Money, 2014, vol. 31, issue C, 97-126

Abstract: This paper examines the impact of bank revenue diversification on the performance of banks in an emerging economy. Using a unique dataset with detailed information on non-interest income, our findings show that, conversely to studies on Western economies, a shift toward non-interest activities increases bank profits and risk-adjusted profits particularly when banks are more involved in trading in government securities. Our results also indicate that foreign banks benefit more from such a shift than their domestic counterparts. Moreover, we account for the institutional and regulatory environment advocating loans to SMEs and find that higher involvement in non-interest activities is only beneficial for banks with low exposures to SMEs. Our findings have important policy implications in terms of achieving optimal diversification and lower risk exposure, which might conflict with policies aiming to promote SME lending.

Keywords: Emerging economies; Bank revenue diversification; Bank risk and profitability (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2014
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Working Paper: Is Bank Income Diversification Beneficial? Evidence from an Emerging Economy (2014)
Working Paper: Is Bank Income Diversification Beneficial? Evidence from an Emerging Economy (2013) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:31:y:2014:i:c:p:97-126

DOI: 10.1016/j.intfin.2014.03.007

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Journal of International Financial Markets, Institutions and Money is currently edited by I. Mathur and C. J. Neely

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