Diversification, Efficiency and Risk of Banks: Evidence From Emerging Economies

54 Pages Posted: 15 Jul 2019

See all articles by Ji Wu

Ji Wu

Southwestern University of Finance and Economics (SWUFE) - Research Institute of Economics & Management; Pennsylvania State University Harrisburg

Limei Chen

Fudan University - School of Management

Minghua Chen

Southwestern University of Finance and Economics - Research Institute of Economics and Management

Bang Nam Jeon

Drexel University - Department of Economics & International Business; Drexel University-School of Economics

Date Written: May 15, 2019

Abstract

This paper examines the impact of business diversification of banks on their risk, with efficiency taken into consideration as a conduit. Using bank-level data from more than 1000 commercial banks in 39 emerging economies during the period of 2000-2016, we find that increased business diversification exerts two competing effects on bank risk. The direct effect of increased diversification bolsters the stability of banks, but it is offset by the indirect effect whereby lowered efficiency, which is resulted from higher diversification, increases the riskiness of banks. In addition, we also find some evidence that the diversification-risk nexus is heterogeneous on the size, market power and ownership of banks.

Keywords: Diversification; efficiency; bank risk; emerging economies

JEL Classification: G21; G15; L25

Suggested Citation

Wu, Ji and Chen, Limei and Chen, Minghua and Jeon, Bang Nam, Diversification, Efficiency and Risk of Banks: Evidence From Emerging Economies (May 15, 2019). Available at SSRN: https://ssrn.com/abstract=3419935 or http://dx.doi.org/10.2139/ssrn.3419935

Ji Wu

Southwestern University of Finance and Economics (SWUFE) - Research Institute of Economics & Management ( email )

55 Guanghuacun St
Chengdu, Sichuan 610074
China

Pennsylvania State University Harrisburg ( email )

777 West Harrisburg Pike
Middletown, PA 17057
United States

Limei Chen

Fudan University - School of Management ( email )

No. 670, Guoshun Road
No.670 Guoshun Road
Shanghai, 200433
China

Minghua Chen (Contact Author)

Southwestern University of Finance and Economics - Research Institute of Economics and Management ( email )

Gezhi Building 1201
555 Liutai Revenue, Wenjiang District
Chengdu, Sichuan 610074
China

Bang Nam Jeon

Drexel University - Department of Economics & International Business ( email )

3141 Chestnut St.
Philadelphia, PA 19104
United States

Drexel University-School of Economics ( email )

3141 Chestnut St.
Philadelphia, PA 19104
United States

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