Does Revenue Diversification Still Matter in Banking? Evidence From a Cross-Country Analysis

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.

Determinants of the Profitability and Stability of Euro Area Banks During the Ice Age of Interest Rates

“…According to previous literature, we focus on covariates which proxy size (Barth et al, 2023;Berger and Bouwman, 2013;Chernykh, 2014;Clark et al, 2018;Mare, 2015), capitalization (Dietrich and Wanzenried, 2014), credit quantity and quality (Abreu and Mendes, 2001;Demirguc Kunt and Huizinga, 2000;Goddard et al, 2013), operational efficiency (Dietrich and Wanzenried, 2014;Goddard et al, 2013;Molyneux and Thorton, 1992), income diversification (Berger et al, 2010a;Berger et al, 2010b;De Young and Rice, 2004a;De Young and Rice, 2004b;Kohler, 2014;Kohler, 2015;Lepetit et al, 2008;Mergaerts and Vander Vennet, 2016;Paltrinieri et al, 2021;Rossi et al, 2020;Stiroh 2004;Stiroh and Rumble, 2006) and funding strategies (Chiorazzo et al, 2018;Lopez-Penabad et al, 2022;Mare, 2015).…”