Income Diversification Strategy on Bank Stability:International Banks Evidence

Handy Octavianus, Khaira Amalia Fachrudin

Abstract


This study aims to analyze the implementation of the income diversification strategy on bank stability carried out by international banks. This study uses panel data from 32 international banking companies from 2010-2019 with a total of 320 firm years of observation. The generalized method of moments is used as a statistical analysis tool for panel data. The study results show that the implementation of the income diversification strategy carried out by international banks was convincingly able to increase bank stability. This indicates that international banks were able to perform cost diversification efficiency to achieve better stability. Furthermore, the use of high leverage could reduce bank stability. This study shows robust results in the measurement of income diversification using either the Herfindahl Hirschman Index (HHI) or the ratio of non-interest income to total income. This is a premier formal assessment of the nexus between income diversification strategies and risk management among the largest commercial banks in the world context. This research is expected to be useful for banking management, regulators, and investors in the banking sector.


Keywords


income diversification, non-interest income, bank stability, bank z-score, GMM

Full Text:

PDF

References


Abbas, F., & Ali, S. (2021). Dynamics of diversification and banks' risk‐taking and stability: Empirical analysis of commercial banks. Managerial and Decision Economics. doi:10.1002/mde.3434

Abuzayed, B., Al-Fayoumi, N., & Molyneux, P. (2018). Diversification and bank stability in the GCC. Journal of International Financial Markets, Institutions and Money, 57, 17-43. doi:10.1016/j.intfin.2018.04.005

Acharya, V. V., Afonso, G., & Kovner, A. (2017). How do global banks scramble for liquidity? Evidence from the asset-backed commercial paper freeze of 2007. Journal of Financial Intermediation, 30, 1-34. doi:10.1016/j.jfi.2016.02.002

Al-Hunnayan, S. H. (2020). The capital structure decisions of Islamic banks in the GCC. Journal of Islamic Accounting and Business Research, 11(3), 745-764. doi:10.1108/jiabr-02-2017-0026

Ali, M., Khattak, M. A., & Alam, N. (2021). Credit risk in dual banking systems: does competition matter? Empirical evidence. International Journal of Emerging Markets, ahead-of-print(ahead-of-print). doi:10.1108/ijoem-01-2020-0035

AlKhouri, R., & Arouri, H. (2019). The effect of diversification on risk and return in banking sector. International Journal of Managerial Finance, 15(1), 100-128. doi:10.1108/ijmf-01-2018-0024

Amoah, B., Bokpin, G. A., Ohene‐Asare, K., & Aboagye, A. Q. Q. (2021). Drivers of income diversification in credit unions: Do size, resource, liquidity, and environment matter? Managerial and Decision Economics, 42(6), 1407-1420. doi:10.1002/mde.3314

Arellano, M., & Bond, S. (1991). Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application toEmployment Equations. The Review of Economic Studies, 58, 277-297. Retrieved from http://www.jstor.org/stable/2297968

Ayadi, M. A., Ayadi, N., & Trabelsi, S. (2019). Corporate governance, European bank performance and the financial crisis. Managerial Auditing Journal, 34(3), 338-371. doi:10.1108/maj-11-2017-1704

Bleck, A. (2018). Regulating bank leverage. Journal of Financial Economic Policy, 10(2), 264-274. doi:10.1108/jfep-12-2017-0122

Bolarinwa, S. T., & Adegboye, A. A. (2020). Re-examining the determinants of capital structure in Nigeria. Journal of Economic and Administrative Sciences, 37(1), 26-60. doi:10.1108/jeas-06-2019-0057

Dahir, A. M., Mahat, F. B., & Ali, N. A. B. (2018). Funding liquidity risk and bank risk-taking in BRICS countries. International Journal of Emerging Markets, 13(1), 231-248. doi:10.1108/IJoEM-03-2017-0086

Dang, V. D., & Dang, V. C. (2021). How do bank characteristics affect the bank liquidity creation channel of monetary policy? Finance Research Letters. doi:10.1016/j.frl.2021.101984

Diamond, D. W., & Rajan, R. G. (2000). A Theory of Bank Capital. The Journal of Finance, LV(6), 2431-2465.

Durand, P., & Le Quang, G. (2021). Banks to basics! Why banking regulation should focus on equity. European Journal of Operational Research. doi:10.1016/j.ejor.2021.10.057

Etudaiye-Muhtar, O. F., & Abdul-Baki, Z. (2020). Market structure, institutional quality and bank capital ratios: evidence from developing countries. European Journal of Management and Business Economics, 30(1), 92-107. doi:10.1108/ejmbe-09-2019-0158

Fachrudin, K. A. (2021). Insolvency and financial health prediction model for the listed companies on the Indonesia Stock Exchange. Jurnal Akuntansi dan Auditing Indonesia, 25(1), 24. doi:10.20885/jaai.vol25.i

Gafrej, O., & Boujelbéne, M. (2021). The impact of performance, liquidity and credit risks on banking diversification in a context of financial stress. International Journal of Islamic and Middle Eastern Finance and Management, ahead-of-print(ahead-of-print). doi:10.1108/imefm-09-2020-0488

Gale, D., & Gottardi, P. (2020). A general equilibrium theory of banks' capital structure. Journal of Economic Theory, 186. doi:10.1016/j.jet.2020.104995

Ghenimi, A., Chaibi, H., & Omri, M. A. B. (2017). The effects of liquidity risk and credit risk on bank stability: Evidence from the MENA region. Borsa Istanbul Review, 17(4), 238-248. doi:10.1016/j.bir.2017.05.002

Ghosh, S., & Chatterjee, G. (2018). Capital structure, ownership and crisis: how different are banks? Journal of Financial Regulation and Compliance, 26(2), 300-330. doi:10.1108/jfrc-09-2016-0085

Guizani, M. (2020). The determinants of capital structure of Islamic and conventional banks: an autoregressive distributed lag approach. Journal of Islamic Accounting and Business Research, 12(1), 131-147. doi:10.1108/jiabr-06-2020-0177

Gupta, J., & Kashiramka, S. (2020). Financial stability of banks in India: Does liquidity creation matter? Pacific-Basin Finance Journal, 64. doi:10.1016/j.pacfin.2020.101439

Haq, M., Hu, D., Faff, R., & Pathan, S. (2018). New evidence on national culture and bank capital structure. Pacific-Basin Finance Journal, 50, 41-64. doi:10.1016/j.pacfin.2017.09.005

Hoque, H., & Pour, E. K. (2018). Bank-level and country-level determinants of bank capital structure and funding sources. International Journal of Finance & Economics, 23(4), 504-532. doi:10.1002/ijfe.1635

Hunjra, A. I., Hanif, M., Mehmood, R., & Nguyen, L. V. (2020). Diversification, corporate governance, regulation and bank risk-taking. Journal of Financial Reporting and Accounting, 19(1), 92-108. doi:10.1108/jfra-03-2020-0071

Lee, C. C., Chen, P. F., & Zeng, J. H. (2020). Bank Income Diversification, Asset Correlation and Systemic Risk. South African Journal of Economics, 88(1), 71-89. doi:10.1111/saje.12235

Liu, F. H., Norden, L., & Spargoli, F. (2020). Does uniqueness in banking matter? Journal of Banking & Finance, 120. doi:10.1016/j.jbankfin.2020.105941

Luu, H. N., Nguyen, L. Q. T., Vu, Q. H., & Tuan, L. Q. (2019). Income diversification and financial performance of commercial banks in Vietnam. Review of Behavioral Finance, 12(3), 185-199. doi:10.1108/rbf-05-2019-0066

Moudud-Ul-Huq, S. (2019). Can BRICS and ASEAN-5 emerging economies benefit from bank diversification? Journal of Financial Regulation and Compliance, 27(1), 43-69. doi:10.1108/jfrc-02-2018-0026

Myers, S. C. (1984). The Capital Structure Puzzle. The Journal of Finance, XXXIX, 575-591.

Ozili, P. K. (2018). Banking stability determinants in Africa. International Journal of Managerial Finance, 14(4), 462-483. doi:10.1108/ijmf-01-2018-0007

Paltrinieri, A., Dreassi, A., Rossi, S., & Khan, A. (2020). Risk-adjusted profitability and stability of Islamic and conventional banks: Does revenue diversification matter? Global Finance Journal. doi:10.1016/j.gfj.2020.100517

Ramlall, I. (2018). Banking Sector and Financial Stability. In The Banking Sector Under Financial Stability (pp. 13-27).

Sahyouni, A., Zaid, M. A. A., & Adib, M. (2021). Bank soundness and liquidity creation. EuroMed Journal of Business, 16(1), 86-107. doi:10.1108/emjb-04-2019-0061

Sissy, A. M., Amidu, M., & Abor, J. Y. (2017). The effects of revenue diversification and cross border banking on risk and return of banks in Africa. Research in International Business and Finance, 40, 1-18. doi:10.1016/j.ribaf.2016.09.017

Smaoui, H., Mimouni, K., Miniaoui, H., & Temimi, A. (2020). Funding liquidity risk and banks' risk-taking: Evidence from Islamic and conventional banks. Pacific-Basin Finance Journal, 64. doi:10.1016/j.pacfin.2020.101436

Tan, Y., & Anchor, J. (2017). Does competition only impact on insolvency risk? New evidence from the Chinese banking industry. International Journal of Managerial Finance, 13(3), 332-354. doi:10.1108/ijmf-06-2016-0115

Tran, D. V., Hassan, M. K., Girerd‐Potin, I., & Louvet, P. (2020). Activity Strategies, Agency Problems, and Bank Risk. Journal of Financial Research, 43(3), 575-613. doi:10.1111/jfir.12216

Vidyarthi, H. (2019). Dynamics of income diversification and bank performance in India. Journal of Financial Economic Policy, 12(3), 383-407. doi:10.1108/jfep-05-2019-0084

Wang, C., & Lin, Y. (2021). Income diversification and bank risk in Asia Pacific. The North American Journal of Economics and Finance, 57. doi:10.1016/j.najef.2021.101448

Wei, K. C., Razak, N. H. A., & Kamarudin, F. (2017). Non-interest Activities Affect the Bank Risk in the Asia Pacific Region. Paper presented at the Global Conference on Business and Economic Research (GCBER) 2017, University Putra Malaysia, Malaysia.

Wu, J., Chen, L., Chen, M., & Jeon, B. N. (2020). Diversification, efficiency and risk of banks: Evidence from emerging economies. Emerging Markets Review, 45. doi:10.1016/j.ememar.2020.100720

Yang, H.-F., Liu, C.-L., & Yeutien Chou, R. (2020). Bank diversification and systemic risk. The Quarterly Review of Economics and Finance, 77, 311-326. doi:10.1016/j.qref.2019.11.003




DOI: https://doi.org/10.26905/jkdp.v26i3.7764

Refbacks

  • There are currently no refbacks.


Bookmark and Share


Jurnal Keuangan dan Perbankan (Journal of Finance and Banking)

Diploma Program of Banking and Finance, Faculty of Economics and Business, University of Merdeka Malang

Published by University of Merdeka Malang

Mailing Address:
2nd floor Finance and Banking Building, Jl. Terusan Raya Dieng No. 57 Malang, East Java, Indonesia
Phone: +62 813-3180-1534
Email: jkp@unmer.ac.id

This work is licensed under a Creative
Commons Attribution-ShareAlike 4.0