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The universal bank model: Synergy or vulnerability?

  • Xi YangEmail author
  • Michael Brei
Original Article

Abstract

In this paper, we examine the costs and benefits of diversification and expansion into non-traditional activities on the bank level. Using detailed information on the US banking sector over the period 2002–2012, we investigate whether or not banks’ involvement in various business lines has been associated with higher risks and returns. Using cross-sectional analysis, we find evidence that banks’ expansion into non-traditional activities has lacked revenue and diversification benefits: The overall risks of non-traditional banks have been higher, while returns were not. A higher degree of diversification across traditional and certain non-traditional activities, on the contrary, has been associated with higher returns and risk-reduction benefits. The results thus indicate that diversification prior to the financial crisis proved effective in the crisis environment, whereas too high involvement in non-traditional businesses did not. These results hold for small and large banks, banks of different tax status and various profitability and risk measures.

Keywords

Banking Diversification Non-traditional activities Risk Profitability 

JEL Classification

G21 

Notes

Acknowledgements

We would like to thank the Editor Professor Singh, an anonymous referee, Michel Boutillier, Elena Dumitrescu, Adam Gersl, Bertand Groslambert, Mathias Lé, Matthias Köhler, Laurence Scialom, Alfredo Schclarek, Tatiana Yongoua and the participants of the 5th International Conference of the Financial Engineering and Banking Society, 32nd International Symposium on Money, Banking and Finance, and the Financial Intermediation Seminar at University Paris Nanterre for valuable and helpful comments. All remaining errors are ours.

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Copyright information

© Springer Nature Limited 2019

Authors and Affiliations

  1. 1.School of Finance and EconomicsJiangsu UniversityZhenjiangChina
  2. 2.EconomiX-CNRS, Université Paris NanterreNanterreFrance
  3. 3.LEM-CNRS, Faculté des Sciences Economiques et SocialesUniversité de LilleLilleFrance
  4. 4.Department of EconomicsThe University of the West IndiesCave HillBarbados

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