Product diversification and bank risk

evidence from South Asian banking institutions

Research output: Contribution to journalArticleResearchpeer-review

Abstract

We investigate whether the product diversification activities of South Asian banking institutions have led to an increase or decrease in their solvency and profit risks. Using the data of five countries–India, Bangladesh, Nepal, Pakistan and Sri Lanka–for the period 2000–2016, we analyse the effect of both income and assets diversification activities on the Z-score and SDs of ROA (Return on Assets) and ROE Return on Equity). Among income diversification activities, securities trading income has a significant positive influence on bank risk while other categories have no influence. With respect to assets diversification, non-interest-bearing assets and loans given to government were found to have a significant positive influence on bank risk, while mortgage loans and non-classified loans have opposite influences. However, the impacts of securities trading income and loans given to the government are mainly confined to private sector banks and state-owned banks, respectively. We also uncover some country-specific diversification influences on the above relationships.

Original languageEnglish
Pages (from-to)444-464
Number of pages21
JournalApplied Economics
Volume51
Issue number5
DOIs
Publication statusPublished - 2019

Keywords

  • assets
  • banking institutions
  • Diversification
  • income
  • South Asia

Cite this

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title = "Product diversification and bank risk: evidence from South Asian banking institutions",
abstract = "We investigate whether the product diversification activities of South Asian banking institutions have led to an increase or decrease in their solvency and profit risks. Using the data of five countries–India, Bangladesh, Nepal, Pakistan and Sri Lanka–for the period 2000–2016, we analyse the effect of both income and assets diversification activities on the Z-score and SDs of ROA (Return on Assets) and ROE Return on Equity). Among income diversification activities, securities trading income has a significant positive influence on bank risk while other categories have no influence. With respect to assets diversification, non-interest-bearing assets and loans given to government were found to have a significant positive influence on bank risk, while mortgage loans and non-classified loans have opposite influences. However, the impacts of securities trading income and loans given to the government are mainly confined to private sector banks and state-owned banks, respectively. We also uncover some country-specific diversification influences on the above relationships.",
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Product diversification and bank risk : evidence from South Asian banking institutions. / Edirisuriya, Piyadasa; Gunasekarage, Abeyratna; Perera, Shrimal.

In: Applied Economics, Vol. 51, No. 5, 2019, p. 444-464.

Research output: Contribution to journalArticleResearchpeer-review

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T1 - Product diversification and bank risk

T2 - evidence from South Asian banking institutions

AU - Edirisuriya, Piyadasa

AU - Gunasekarage, Abeyratna

AU - Perera, Shrimal

PY - 2019

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N2 - We investigate whether the product diversification activities of South Asian banking institutions have led to an increase or decrease in their solvency and profit risks. Using the data of five countries–India, Bangladesh, Nepal, Pakistan and Sri Lanka–for the period 2000–2016, we analyse the effect of both income and assets diversification activities on the Z-score and SDs of ROA (Return on Assets) and ROE Return on Equity). Among income diversification activities, securities trading income has a significant positive influence on bank risk while other categories have no influence. With respect to assets diversification, non-interest-bearing assets and loans given to government were found to have a significant positive influence on bank risk, while mortgage loans and non-classified loans have opposite influences. However, the impacts of securities trading income and loans given to the government are mainly confined to private sector banks and state-owned banks, respectively. We also uncover some country-specific diversification influences on the above relationships.

AB - We investigate whether the product diversification activities of South Asian banking institutions have led to an increase or decrease in their solvency and profit risks. Using the data of five countries–India, Bangladesh, Nepal, Pakistan and Sri Lanka–for the period 2000–2016, we analyse the effect of both income and assets diversification activities on the Z-score and SDs of ROA (Return on Assets) and ROE Return on Equity). Among income diversification activities, securities trading income has a significant positive influence on bank risk while other categories have no influence. With respect to assets diversification, non-interest-bearing assets and loans given to government were found to have a significant positive influence on bank risk, while mortgage loans and non-classified loans have opposite influences. However, the impacts of securities trading income and loans given to the government are mainly confined to private sector banks and state-owned banks, respectively. We also uncover some country-specific diversification influences on the above relationships.

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