Dynamics of diversification and banks' risk‐taking and stability: Empirical analysis of commercial banks

Abstract

This study examines the impact of asset, income, and funding diversification on the risk and stability of US commercial banks ranges from 2002 to 2019 by using two-stage instrumental variables and GMM technique. The findings reveal that funding and asset (income) diversification decreases (increases) the banks' risks. The results indicated that income diversification has a significantly detrimental impact on the banks' stability, whereas funding and assets diversification positively contributes to banks' stability. The impact of diversification on risk-taking and stability is heterogeneous for various categories and crisis period. Our study provides useful insights to policymakers and bank regulators.

Do Bank Funding Diversity and Bank Lending Affect Net Interest Margins? Evidence From Asia Markets Before and During the Covid-19 Pandemic

“…However, the result in Vietnam and China are consistent with Acharya and Naqvi (2012), Vo (2020), and T. L. A. Nguyen (2018) but inconsistent with King (2013) and Abbas and Ali (2022). This evidence supports the diversification theory because increasing funding diversity effectively promotes the financial intermediaries, enhancing liquidity and improving bank profitability (Ghosh, 2018).…”

“…The result in the full sample and Taiwan state that it is costly to maintain diversified funding sources, and it will reduce bank profitability because banks must pay extra interest expenses to maintain stable funding, negatively eroding NIM (King, 2013). However, the result in Vietnam and China are consistent with Acharya and Naqvi (2012), Vo (2020), and T. L. A. Nguyen (2018) but inconsistent with King (2013) and Abbas and Ali (2022). This evidence supports the diversification theory because increasing funding diversity effectively promotes the financial intermediaries, enhancing liquidity and improving bank profitability (Ghosh, 2018).…”

“…Duong et al (2023), Vo (2020), Moudud-Ul-Huq et al (2018), and Vo and Tran (2016) also report that funding diversity increase bank profitability, especially in time of crisis (Pham & Nguyen, 2023). However, some studies show that funding diversity adversely affects bank profitability because it is costly to maintain diversified funding sources (Abbas & Ali, 2022; King, 2013). Therefore, investigating the role of funding diversity in banking profitability still needs more attention.…”

“…Therefore, Vo (2020) suggests that maintaining diversity and stability in the capital is essential for sustainable banking development. However, other studies state that funding diversification reduces bank profitability it is costly to maintain diversified funding sources (Abbas & Ali, 2022; King, 2013). In addition, the pecking order theory and the trade-off theory do not emphasize diversifying capital structure but instead focus on optimizing the benefits derived from internal and external sources of capital.…”

Enhancing bank stability from diversification and digitalization perspective in ASEAN

“…However, the implication of bank diversification on stability is still a dynamic puzzle. Some reports show that diversification might worsen bank instability (Kim et al , 2020; Abbas and Ali, 2022; DeYoung and Torna, 2013; Nisar et al , 2018). Köhler (2015) finds that greater share of non-interest income will increase risk for investment banks.…”