Does diversification increase or decrease bank risk and performance? : Evidence on diversification and the risk-return tradeoff in banking

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dc.contributor Bank of Finland
dc.contributor.author Berger, Allen N.
dc.contributor.author Hasan, Iftekhar
dc.contributor.author Korhonen, Iikka
dc.contributor.author Zhou, Mingming
dc.date.accessioned 2010-09-22T08:00:37Z
dc.date.available 2014-09-22T08:00:37Z
dc.date.issued 2010
dc.identifier.isbn 978-952- 462- 684-2
dc.identifier.issn 1456-5889
dc.identifier.uri https://helda.helsinki.fi/bof/handle/123456789/8322
dc.description.abstract Conventional wisdom in banking argues that diversification tends to reduce bank risk and improve performance, but the recent financial crisis suggests that aggressive diversification strategies may have resulted in increased risk taking and poor performance. This paper addresses this important question by evaluating the empirical relationship between diversification strategies and the risk-return tradeoff in banking. Our data set covers Russian banks during the 1999-2006 period and finds somewhat mixed results. Specifically, we find that banks performance tends to be non-monotonically related to their diversification strategy. The marginal effects of focus indices (inverse measures of diversification) on performance are nonlinearly associated with the level of risk and foreign ownership. A focused strategy is found to be associated with increased profit and decreased risk only up to a certain threshold. Additionally, when foreign ownership is either very high or very low, banks tend to benefit more from being diversified. This analysis provides important strategic and policy implications for bank managers and regulators in Russia as well as in other emerging economies.
dc.format.extent 56 s.
dc.language.iso eng
dc.relation.ispartofseries BOFIT Discussion Papers
dc.rights https://helda.helsinki.fi/bof/copyright
dc.subject pankkitoiminta
dc.subject riskit
dc.subject tuotot
dc.subject ulkomaiset pankit
dc.subject hajautus
dc.subject Venäjä
dc.subject kannattavuus
dc.subject SP
dc.subject RP
dc.subject RP ST
dc.subject Bofit-kokoelma
dc.title Does diversification increase or decrease bank risk and performance? : Evidence on diversification and the risk-return tradeoff in banking
dc.type Sarjajulkaisu
dc.identifier.urn URN:NBN:fi:bof-201408071987
dc.series.name BOFIT Discussion Papers
dc.series.year 2010
dc.series.number 9/2010
dc.series.sortingnumber 9
dc.date.publication 18.7.2010
dc.contributor.orgunit Institute for Economies in Transition (BOFIT)

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