1,094
Views
34
CrossRef citations to date
0
Altmetric
Original Articles

Diversification and bank profitability: a nonlinear approach

, &
 

Abstract

Using information on 98 internationally active banks headquartered in 27 countries over the period 1994–2012, we analyse the nonlinear link between income diversification (defined as noninterest income to total income) and bank return on assets (ROA). The main result is that income diversification is positively correlated with bank profitability only up to a certain degree (30% of the diversification ratio). Diversification benefits for global systemically important banks (GSIBs) are less sizable and significant, especially when we use volatility-adjusted return as a measure of bank profitability.

JEL Classification:

Acknowledgements

We would like to thank Kostas Tsatsaronis and Adrian van Rixtel for helpful comments and suggestions. The views expressed here are those of the authors and do not necessarily reflect those of the BIS.

Notes

1 Due to some limitation in data availability over the time horizon 1994–2012, we consider only 26 out of the 28 GSIBs. For more information see http://www.financialstabilityboard.org/publications/r_121031ac.pdf.

2 Similar results are obtained by using as an alternative measure of profitability the return on equity (ROE) instead of the ROA and splitting the sample in pre-crisis and after crisis periods. For more details see Gambacorta and van Rixtel (Citation2013).

3 ROA SE is calculated recursively using information on ROA for the previous 4 years. Results do not change, extending the horizon for the calculation of the SE based on the previous 6 or 8 years.

Reprints and Corporate Permissions

Please note: Selecting permissions does not provide access to the full text of the article, please see our help page How do I view content?

To request a reprint or corporate permissions for this article, please click on the relevant link below:

Academic Permissions

Please note: Selecting permissions does not provide access to the full text of the article, please see our help page How do I view content?

Obtain permissions instantly via Rightslink by clicking on the button below:

If you are unable to obtain permissions via Rightslink, please complete and submit this Permissions form. For more information, please visit our Permissions help page.