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Diversification, efficiency and risk of banks: Evidence from emerging economies

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  • Wu, Ji
  • Chen, Limei
  • Chen, Minghua
  • Jeon, Bang Nam

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. Thus, the overall benefits from bank business diversification on bank stability rely on the trade-off of the two competing forces.

Suggested Citation

  • Wu, Ji & Chen, Limei & Chen, Minghua & Jeon, Bang Nam, 2020. "Diversification, efficiency and risk of banks: Evidence from emerging economies," Emerging Markets Review, Elsevier, vol. 45(C).
    • Handle: RePEc:eee:ememar:v:45:y:2020:i:c:s1566014120302284
    DOI: 10.1016/j.ememar.2020.100720
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    Keywords

    Diversification; Efficiency; Bank risk; Emerging economies;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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