Between Stability and Exposure: The Dual Effects of Income Diversification on Bank Risk

Aysa Siddika, Abdullah Sarwar (), Mohammad Ali Tareq and Pallabi Siddiqua
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Aysa Siddika: Centre for Management and Marketing Innovation (CMMI), COE for Business Innovation and Communication, Faculty of Management, Multimedia University, Cyberjaya 63100, Malaysia
Abdullah Sarwar: Centre for Management and Marketing Innovation (CMMI), COE for Business Innovation and Communication, Faculty of Management, Multimedia University, Cyberjaya 63100, Malaysia
Mohammad Ali Tareq: Department of Finance, Faculty of Business and Economics, Universiti Malaya (UM), Kuala Lumpur 50603, Malaysia
Pallabi Siddiqua: Department of Finance, Faculty of Business Studies, University of Dhaka, Dhaka 1000, Bangladesh

JRFM, 2025, vol. 18, issue 11, 1-17

Abstract: The traditional role of banks as intermediaries has been transferred to a vast array of businesses, creating many sources of income. The present study examines the impact of income diversification on bank risk. A total of 565 commercial banks from 50 countries were examined. A dynamic panel data analysis using Maximum Likelihood with Structural Equation Modelling was performed. The study found that income diversification has no significant effect on risk-weighted assets, while it reduces the insolvency risk and liquidity risk of the bank. Multiple proxies were utilized to measure bank risk to increase the robustness of the study. The study stressed the importance of income diversification and efficient capital allocation across various investment projects to survive in a highly competitive environment. Overall, this study provides new insights into the contradictory relationship between income diversification and bank risk in the global context. This would assist in developing strategies and policies to reduce risk and increase stability in the banking sector.

Keywords: bank risk; income diversification; insolvency risk; liquidity risk; Structural Equation Modelling (SEM) (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2025
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