Product diversification and bank risk: evidence from South Asian banking institutions

Piyadasa Edirisuriya, Abeyratna Gunasekarage and Shrimal Perera

Applied Economics, 2019, vol. 51, issue 5, 444-464

Abstract: We investigate whether the product diversification activities of South Asian banking institutions have led to an increase or decrease in their solvency and profit risks. Using the data of five countries – India, Bangladesh, Nepal, Pakistan and Sri Lanka – for the period 2000–2016, we analyse the effect of both income and assets diversification activities on the Z-score and SDs of ROA (Return on Assets) and ROE Return on Equity). Among income diversification activities, securities trading income has a significant positive influence on bank risk while other categories have no influence. With respect to assets diversification, non-interest-bearing assets and loans given to government were found to have a significant positive influence on bank risk, while mortgage loans and non-classified loans have opposite influences. However, the impacts of securities trading income and loans given to the government are mainly confined to private sector banks and state-owned banks, respectively. We also uncover some country-specific diversification influences on the above relationships.

Date: 2019
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DOI: 10.1080/00036846.2018.1489516

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