DOES REVENUE DIVERSIFICATION STILL MATTER IN BANKING? EVIDENCE FROM A CROSS-COUNTRY ANALYSIS

Simone Rossi (), Alberto Dreassi (), Mariarosa Borroni () and Andrea Paltrinieri ()
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Simone Rossi: Università Cattolica del Sacro Cuore, Via E. Parmense, 84, Piacenza, Italy
Alberto Dreassi: University of Trieste, Piazzale Europa, 1, Trieste, Italy
Mariarosa Borroni: Università Cattolica del Sacro Cuore, Via Necchi, 5/7, Milan, Italy
Andrea Paltrinieri: University of Udine, Via Tomadini, 30/A, Udine, Italy

Journal of Financial Management, Markets and Institutions (JFMMI), 2020, vol. 08, issue 02, 1-30

Abstract: Banks have been revising their business models since the financial crisis, diversifying income sources to pursue profitability and stability in a rapidly evolving environment. The effectiveness of this strategy is still debated. We investigate if revenue diversification of 1250 EU and US banks improved performance or its stability between 2008 and 2016. We adopt a broad econometric approach and define diversification as the share of non-interest revenue and the HH index of the net operating income. We find that diversification is not clearly associated with performance or its volatility, that benefits change remarkably over time and, where present, show significant variability. Our results support recent evidence on the limitations of diversification in banking, raising potential concerns on converging supervisory practices and general calls for revenue diversity. The variability of business models and the impacts of different economic and institutional environments matter.

Keywords: Banks; diversification; Z-score; performance (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1142/S2282717X20500036

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