Search Advanced

Quantitative Finance and Economics

2025, Volume 9, Issue 3: 529-553. doi: 10.3934/QFE.2025018
Previous Article Next Article
Research article

The impact of diversification on risk and stability in Asian banks

  • 1.
    Department of Business Administration, Baba Guru Nanak University, Nankana Sahib, Pakistan
  • 2.
    Department of Management Science, MY University, Islamabad, Pakistan
  • Published: 02 July 2025

  • JEL Codes: G01, G21, G28

  • This study employs system generalized method of moments (GMM) procedures to explore the impact of asset, income, and funding diversification on the stability and risk-taking of Asian banks, using data from 2000 to 2023. The findings showed that agency theory, portfolio theory, trade-off theory, and the resource-based view provide a basis for the relationships between diversification and banks' stability/risk-taking. The findings reveal that asset diversification enhances the stability of banks and decreases their risk; however, funding diversification decreases that stability and increases their risk in Asia. The results also highlight the benefits of income diversification for banks in Asia, as it enhances their stability and mitigates risk. The results reveal a significant variation in the impact of diversification on the stability and risk-taking of commercial, savings, and Islamic banks. In addition, the findings remain heterogeneous across the other attributes of banks, like capitalization, liquidity, size, and growth. The findings have implication for policymakers and regulators.

    Citation: Faisal Abbas, Mutee Ur Rehman. 2025: The impact of diversification on risk and stability in Asian banks, Quantitative Finance and Economics, 9(3): 529-553. doi: 10.3934/QFE.2025018

    Related Papers:

  • This study employs system generalized method of moments (GMM) procedures to explore the impact of asset, income, and funding diversification on the stability and risk-taking of Asian banks, using data from 2000 to 2023. The findings showed that agency theory, portfolio theory, trade-off theory, and the resource-based view provide a basis for the relationships between diversification and banks' stability/risk-taking. The findings reveal that asset diversification enhances the stability of banks and decreases their risk; however, funding diversification decreases that stability and increases their risk in Asia. The results also highlight the benefits of income diversification for banks in Asia, as it enhances their stability and mitigates risk. The results reveal a significant variation in the impact of diversification on the stability and risk-taking of commercial, savings, and Islamic banks. In addition, the findings remain heterogeneous across the other attributes of banks, like capitalization, liquidity, size, and growth. The findings have implication for policymakers and regulators.



    加载中


    [1] Abbas F, Ali S (2022) Dynamics of diversification and banks' risk-taking and stability: Empirical analysis of commercial banks. Manag Decis Econ 43: 1000–1014. https://doi.org/10.1002/mde.3434 doi: 10.1002/mde.3434
    [2] Abbas F, Rubbaniy G, Ali S, et al. (2024) Income and balance sheet diversification effects on banks' cost and profit efficiency: Evidence from the United States. J Financ Res 48: 267–293. https://doi.org/10.1111/jfir.12397 doi: 10.1111/jfir.12397
    [3] Abuzayed B, Al-Fayoumi N, Molyneux P (2018) Diversification and bank stability in the GCC. J Int Financ Mark I 57: 17–43. https://doi.org/10.1016/j.intfin.2018.04.005 doi: 10.1016/j.intfin.2018.04.005
    [4] Acharya VV, Hasan I, Saunders A (2006) Should Banks Be Diversified? Evidence from Individual Bank Loan Portfolios*. J Bus 79: 1355–1412. https://doi.org/10.1086/500679 doi: 10.1086/500679
    [5] Adem M (2023) Impact of income diversification on bank stability: A cross-country analysis. Asian J Account Res 8: 133–144. https://doi.org/10.1108/AJAR-03-2022-0093 doi: 10.1108/AJAR-03-2022-0093
    [6] Allen F, Carletti E, Marquez R (2011) Credit market competition and capital regulation. Rev Financ Stud 24: 983–1018. https://doi.org/10.1093/rfs/hhp089 doi: 10.1093/rfs/hhp089
    [7] Altman EI (1968) Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. J Financ 23: 589–609. https://doi.org/10.1111/j.1540-6261.1968.tb00843.x doi: 10.1111/j.1540-6261.1968.tb00843.x
    [8] Altunbas Y, Carbo S, Gardener EPM, et al. (2007) Examining the Relationships between Capital, Risk and Efficiency in European Banking. Eur Financ Manage 13: 49–70. https://doi.org/10.1111/j.1468-036X.2006.00285.x doi: 10.1111/j.1468-036X.2006.00285.x
    [9] Amihud Y, Lev B (1981) Risk reduction as a managerial motive for conglomerate mergers. Bell J Econ 12: 605–617. https://doi.org/10.2307/3003575 doi: 10.2307/3003575
    [10] Ammar N, Boughrara A (2019) The impact of revenue diversification on bank profitability and risk: Evidence from MENA banking industry. Macroecon Financ Eme 12: 36–70. https://doi.org/10.1080/17520843.2018.1535513 doi: 10.1080/17520843.2018.1535513
    [11] Athanasoglou PP, Brissimis SN, Delis MD (2008) Bank-specific, industry-specific and macroeconomic determinants of bank profitability. J Int Financ Mark I 18: 121–136. https://doi.org/10.1016/j.intfin.2006.07.001 doi: 10.1016/j.intfin.2006.07.001
    [12] Beck T, Demirgüç-Kunt A, Levine R (2010) Financial institutions and markets across countries and over time: The updated financial development and structure database. World Bank Econ Rev 24: 77–92. https://doi.org/10.1093/wber/lhp016 doi: 10.1093/wber/lhp016
    [13] Berger AN, Bouwman CH (2009) Bank liquidity creation. Rev Financ Stud 22: 3779–3837. https://doi.org/10.1093/rfs/hhn104 doi: 10.1093/rfs/hhn104
    [14] Berger AN, Bouwman CH (2013) How does capital affect bank performance during financial crises? J Financ Econ 109: 146–176. https://doi.org/10.1016/j.jfineco.2013.02.008 doi: 10.1016/j.jfineco.2013.02.008
    [15] Berger AN, Hasan I, Zhou M (2010) The effects of focus versus diversification on bank performance: Evidence from Chinese banks. J Bank Financ 34: 1417–1435. https://doi.org/10.1016/j.jbankfin.2010.01.010 doi: 10.1016/j.jbankfin.2010.01.010
    [16] Berger PG, Ofek E (1995) Diversification's effect on firm value. J Financ Econ 37: 39–65. https://doi.org/10.1016/0304-405X(94)00798-6 doi: 10.1016/0304-405X(94)00798-6
    [17] Bikker JA, Hu H (2002) Cyclical patterns in profits, provisioning and lending of banks and procyclicality of the new Basel capital requirements. PSL Q Rev 55: 143–175. https://doi.org/10.13133/2037-3643/9907 doi: 10.13133/2037-3643/9907
    [18] Boyd JH, Levine R, Smith BD (2001) The impact of inflation on financial sector performance. J Monetary Econ 47: 221–248. https://doi.org/10.1016/S0304-3932(01)00049-6 doi: 10.1016/S0304-3932(01)00049-6
    [19] Chen N, Liang HY, Yu MT (2018) Asset diversification and bank performance: Evidence from three Asian countries with a dual banking system. Pac-Basin Financ J 52: 40–53. https://doi.org/10.1016/j.pacfin.2018.02.007 doi: 10.1016/j.pacfin.2018.02.007
    [20] Chong BS, Liu MH (2009) Islamic banking: Interest-free or interest-based? Pac-Basin Financ J 17: 125–144. https://doi.org/10.1016/j.pacfin.2007.12.003 doi: 10.1016/j.pacfin.2007.12.003
    [21] Čihák M, Demirgüç-Kunt A, Feyen E, et al. (2012) Benchmarking financial systems around the world. World Bank Policy Research Working Paper, 6175. Available from: https://papers.ssrn.com/sol3/papers.cfm?abstract_id = 2152254
    [22] Čihák, M, Hesse H (2010) Islamic Banks and Financial Stability: An Empirical Analysis. J Financ Serv Res 38: 95–113. https://doi.org/10.1007/s10693-010-0089-0 doi: 10.1007/s10693-010-0089-0
    [23] Demirgüç-Kunt A, Huizinga H (2010) Bank activity and funding strategies: The impact on risk and returns. J Financ Econ 98: 626–650. https://doi.org/10.1016/j.jfineco.2010.06.004 doi: 10.1016/j.jfineco.2010.06.004
    [24] DeYoung R, Roland KP (2001) Product mix and earnings volatility at commercial banks: Evidence from a degree of total leverage model. J Financ Intermed 10: 54–84. https://doi.org/10.1006/jfin.2000.0305 doi: 10.1006/jfin.2000.0305
    [25] Elsas R, Hackethal A, Holzhäuser M (2010) The anatomy of bank diversification. J Bank Financ 34: 1274–1287. https://doi.org/10.1016/j.jbankfin.2009.11.024 doi: 10.1016/j.jbankfin.2009.11.024
    [26] Farooq M, Zaheer S (2015) Are Islamic Banks More Resilient During Financial Panics? Pac Econ Rev 20: 101–124. https://doi.org/10.1111/1468-0106.12096 doi: 10.1111/1468-0106.12096
    [27] Fresno M, Hanggraeni D (2020) Impact of diversification on systemic risk of conventional banks listed on the Indonesia Stock Exchange. Banks Bank Syst 15: 80–87. https://doi.org/10.21511/bbs.15(4).2020.07 doi: 10.21511/bbs.15(4).2020.07
    [28] Hunjra AI, Hanif M, Mehmood R, et al. (2021) Diversification, corporate governance, regulation and bank risk-taking. J Financ Report Account 19: 92–108. https://doi.org/10.1108/JFRA-03-2020-0071 doi: 10.1108/JFRA-03-2020-0071
    [29] Jensen MC, Meckling WH (1979) Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure, In: K. Brunner (Ed.), Economics Social Institutions, Springer Netherlands, 1: 163–231. https://doi.org/10.1007/978-94-009-9257-3_8
    [30] Kaur P, Bansal A (2024) Income diversification patterns and their impact on bank risk. Aust Econ Pap 63: 570–593. https://doi.org/10.1111/1467-8454.12339 doi: 10.1111/1467-8454.12339
    [31] Laeven L, Levine R (2009) Bank governance, regulation and risk taking. J Financ Econ 93: 259–275. https://doi.org/10.1016/j.jfineco.2008.09.003 doi: 10.1016/j.jfineco.2008.09.003
    [32] Lepetit L, Nys E, Rous P, et al. (2008) Bank income structure and risk: An empirical analysis of European banks. J Bank Financ 32: 1452–1467. https://doi.org/10.1016/j.jbankfin.2007.12.002 doi: 10.1016/j.jbankfin.2007.12.002
    [33] Levine R (1997) Financial development and economic growth: Views and agenda. J Econ Lit 35: 688–726.
    [34] Lewellen WG (1971) A pure financial rationale for the conglomerate merger. J Financ 26: 521–537. https://doi.org/10.1111/j.1540-6261.1971.tb00912.x doi: 10.1111/j.1540-6261.1971.tb00912.x
    [35] Markowitz H (1952) Modern portfolio theory. J Financ 7: 77–91. https://doi.org/10.1111/j.1540-6261.1952.tb01525.x doi: 10.1111/j.1540-6261.1952.tb01525.x
    [36] Nguyen TT, Nguyen TT (2024) Income diversification, credit risk and bank stability: Evidence from an emerging market. Asia-Pac J Account Econ 31: 987–1007. https://doi.org/10.1080/16081625.2023.2257219 doi: 10.1080/16081625.2023.2257219
    [37] Octavianus H, Fachrudin KA (2022) Income diversification on stability in banking industry a systematic literature review. Int J Environ Sustain Social Sci 3: 276–287. https://doi.org/10.38142/ijesss.v3i2.212 doi: 10.38142/ijesss.v3i2.212
    [38] Pappas V, Ongena S, Izzeldin M, et al. (2017) A Survival Analysis of Islamic and Conventional Banks. J Financ Serv Res 51: 221–256. https://doi.org/10.1007/s10693-016-0239-0 doi: 10.1007/s10693-016-0239-0
    [39] Pasha R, Lewaaelhamd I (2024) A comparative study on bank income diversification: Which non-interest income component is beneficial? J Chinese Econ Foreign Trade Stud 17: 49–74. https://doi.org/10.1108/JCEFTS-12-2023-0065 doi: 10.1108/JCEFTS-12-2023-0065
    [40] Rajan RG (2006) Has Finance Made the World Riskier? Eur Financ Manage 12: 499–533. https://doi.org/10.1111/j.1468-036X.2006.00330.x doi: 10.1111/j.1468-036X.2006.00330.x
    [41] Rashid A, Jabeen S (2016) Analyzing performance determinants: Conventional versus Islamic banks in Pakistan. Borsa Istanb Rev 16: 92–107. https://doi.org/10.1016/j.bir.2016.03.002 doi: 10.1016/j.bir.2016.03.002
    [42] Sahputra MR, Adam M (2024) The Effect of Business Cycle, Income Diversification, and Financial Ratios on Bank Risk in the ASEAN Region. J Bus Manage Rev 5: 460–477. https://doi.org/10.47153/jbmr.v5i6.990 doi: 10.47153/jbmr.v5i6.990
    [43] Saif-Alyousfi AY (2022) Determinants of bank profitability: Evidence from 47 Asian countries. J Econ Stud 49: 44–60. https://doi.org/10.1108/JES-05-2020-0215 doi: 10.1108/JES-05-2020-0215
    [44] Saif-Alyousfi AY, Saha A (2021) Determinants of banks' risk-taking behavior, stability and profitability: Evidence from GCC countries. Int J Islamic Middle Eastern Financ Manage 14: 874–907. https://doi.org/10.1108/IMEFM-03-2019-0129 doi: 10.1108/IMEFM-03-2019-0129
    [45] Saif-Alyousfi AY, Saha A, Alshammari TR (2023) Bank diversification and ESG activities: A global perspective. Econ Syst 47: 101094. https://doi.org/10.1016/j.ecosys.2023.101094 doi: 10.1016/j.ecosys.2023.101094
    [46] Saif-Alyousfi AY, Saha A, Md-Rus R (2020) The impact of bank competition and concentration on bank risk-taking behavior and stability: Evidence from GCC countries. N Am J Econ Financ 51: 100867. https://doi.org/10.1016/j.najef.2018.10.015 doi: 10.1016/j.najef.2018.10.015
    [47] Sanya S, Wolfe S (2011) Can Banks in Emerging Economies Benefit from Revenue Diversification? J Financ Serv Res 40: 79–101. https://doi.org/10.1007/s10693-010-0098-z doi: 10.1007/s10693-010-0098-z
    [48] Sawada M (2013) How does the stock market value bank diversification? Empirical evidence from Japanese banks. Pac-Basin Financ J 25: 40–61. https://doi.org/10.1016/j.pacfin.2013.08.001 doi: 10.1016/j.pacfin.2013.08.001
    [49] Shabir M, Jiang P, Shahab Y, et al. (2024) Diversification and bank stability: Role of political instability and climate risk. Int Rev Econ Financ 89: 63–92. https://doi.org/10.1016/j.iref.2023.10.009 doi: 10.1016/j.iref.2023.10.009
    [50] Shim J (2019) Loan portfolio diversification, market structure and bank stability. J Bank Financ 104: 103–115. https://doi.org/10.1016/j.jbankfin.2019.04.006 doi: 10.1016/j.jbankfin.2019.04.006
    [51] Stiroh KJ (2004) Diversification in banking: Is noninterest income the answer? J Money Credit Bank 36: 853–882. https://doi.org/10.1353/mcb.2004.0076 doi: 10.1353/mcb.2004.0076
    [52] Trinh LQ, Doan HTT (2018) Internationalization and the growth of Vietnamese micro, small, and medium sized enterprises: Evidence from panel quantile regressions. J Asian Econ 55: 71–83. https://doi.org/10.1016/j.asieco.2018.01.002 doi: 10.1016/j.asieco.2018.01.002
    [53] Vazquez F, Federico P (2015) Bank funding structures and risk: Evidence from the global financial crisis. J Bank Financ 61: 1–14. https://doi.org/10.1016/j.jbankfin.2015.08.023 doi: 10.1016/j.jbankfin.2015.08.023
    [54] Wu J, Chen L, Chen M, et al. (2020) Diversification, efficiency and risk of banks: Evidence from emerging economies. Emerg Mark Rev 45: 100720. https://doi.org/10.1016/j.ememar.2020.100720 doi: 10.1016/j.ememar.2020.100720
    [55] Zheng C, Bhowmik PK, Sarker N (2019) Industry-specific and macroeconomic determinants of non-performing loans: A comparative analysis of ARDL and VECM. Sustainability 12: 325. https://doi.org/10.3390/su12010325 doi: 10.3390/su12010325
  • Reader Comments
  • © 2025 the Author(s), licensee AIMS Press. This is an open access article distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0)
通讯作者: 陈斌, bchen63@163.com
  • 1. 

    沈阳化工大学材料科学与工程学院 沈阳 110142

  1. 本站搜索
  2. 百度学术搜索
  3. 万方数据库搜索
  4. CNKI搜索
Quantitative Finance and Economics
2.5 2.0

Metrics

Article views(1522) PDF downloads(199) Cited by(0)

Preview PDF
Download XML
Export Citation
Article outline

Figures and Tables

Tables(11)

Other Articles By Authors

Related pages

Tools

/

DownLoad:  Full-Size Img  PowerPoint
Return
Return

Catalog