The Effect of Income Diversification on Bank Risk: Evidence from China

Kaiguo Zhou

73 citations0/0 files storedEmerging Markets Finance and Trade

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Abstract

Using the panel data for sixty-two main Chinese commercial banks during 1997-2012, this paper studies the effect of income diversification on bank risk. According to portfolio theory, the overall risk of banks is decomposed in order to further investigate the contribution of noninterest income. The empirical results show that there is no significant relationship between income diversification and bank risk. The reduction of overall risk is attributed to the significant reduction in the risk of interest income business. While the proportion of noninterest income increases, its volatility also increases, and thus its contribution to overall risk increases. Accordingly, some policy suggestions on the future development of income diversification strategy are proposed.

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References

2004Diversification in Banking: Is Noninterest Income the Answer?2005The dark side of diversification: The case of US financial holding companies 1997Diversification, Size, and Risk at Bank Holding Companies 2006Is there a diversification discount in financial conglomerates?2001Product Mix and Earnings Volatility at Commercial Banks: Evidence from a Degree of Total Leverage Model 2007Bank income structure and risk: An empirical analysis of European banks 2010The effects of focus versus diversification on bank performance: Evidence from Chinese banks 2002Inflation thresholds and the finance–growth nexus

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