Are the effects of market concentration and income diversification on banking performance persistent?
Main Article Content
Keywords
Bank performance, Market concentration, Income diversification
Abstract
We analyze the effects of market concentration and income diversification on banking performance. We used a sample of 134 countries for the period 1994-2011 and used the GMM estimator proposed by Arellano and Bover (1995). Our results show that market concentration and income diversification have a positive and non-linear effect on bank performance. The non-linearity suggests that the positive effect is reversed if the banking industry has high levels of market concentration and income diversification. During an economic crisis, the banking industry reduces diversification to support its performance. These results are relevant for the design of financial policy and banking strategies.
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References
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Arellano, M. & Bover, O. (1995). Another look at the instrumental variable estimation of error-components models. Journal of Econometrics, 68(1), 29-51.
Athanasoglou, P., Brissimis, S., & Delis, M. (2008). Bank-specific, industry specific and macroeconomic determinants of bank profitability. Journal of International Financial Markets, Institutions and Money, 18(2), 121-136.
Baele, L., De Jonghe, O., & Vander-Vennet, R. (2007). Does the stock market value bank diversification? Journal of Banking and Finance, 31(7), 1999-2023.
Beck, T., Demirgüç-Kunt, A. & Levine, R. (2006). Bank concentration, competition and crises: First results. Journal of Banking and Finance, 30, 1581-1603.
Behname, M. (2012). The compare of concentration and efficiency in banking industry: Evidence from the OPEC countries. Eurasian Journal of Business and Economics, 5(10), 15-24.
Ben, S. & Plihon, D. (2011). Revenue diversification in emerging market banks: Implications for financial performance, working paper. hal-00598136v2.
Berger, A. (1995). The profit-structure relationship in banking-tests of market-power and efficient-structure hypotheses. Journal of Money, Credit and Banking, 27(2), 404-431.
Berger, A., & Hannan, T. (1998). The efficiency cost of market power in the banking industry: A test of the “quiet life” and related hypotheses. Review of Economics and Statistics, 80(3), 454-465.
Berger, A., Klapper, L., & Rima, T. (2009). Bank competition and financial stability. Journal of Finance Service Research, 35, 99-118.
Berger, A., Hasan, I., & Zhou, M. (2010). The effects of focus versus diversification on bank performance: Evidence from Chinese banks. Journal of Banking and Finance, 34(7), 1417-1435.
Bikker, J. & Hu, H. (2002). Cyclical patterns in profits, provisioning and lending of banks and procyclicality of the new Basel capital requirements. PSL Quarterly Review, 55(221), 143-175.
Bourke, P. (1989). Concentration and other determinants of bank profitability in Europe, North America and Australia. Journal of Banking and Finance, 13(1), 65-79.
Boyd, J. & De Nicoló, D. (2005). The theory of bank risk taking and competition revisited. The Journal of Finance, 60(3), 1329-1343.
Carbó, S. & Rodríguez, F. (2007). The determinants of bank margins in European banking. Journal of Banking and Finance, 31(7), 2043-2063.
Chen, S. & Liao, C. (2011). Are foreign banks more profitable than domestic banks? Home- and host-country effects of banking market structure, governance, and supervision. Journal of Banking and Finance, 35(4), 819-839.
Chiorazzo, V., Milani, C., & Salvini, F. (2008). Income diversification and bank performance: Evidence from Italian banks. Journal of Financial Services Research, 33(3), 181-203.
Chortareas, G., Garza-Garcia, J., & Girardone, C. (2011). Banking sector performance in Latin America: Market power versus efficiency. Review of Development Economics, 15(2), 307-325.
De Jonghe, O. (2010). Back to the basics in banking? A micro-analysis of banking system stability. Journal of Financial Intermediation, 19(3), 387-417.
Demirgüç-Kunt, A. & Huizinga, H. (1999). Determinants of commercial bank interest margins and profitability: Some international evidence (English). The World Bank Economic Review, 13(2), 379-408.
Demirgüç-Kunt, A. & Huizinga, H. (2000). Financial structure and bank profitability. Policy Research Working Paper Series No. 2430. Washington, D. C.: The World Bank.
Demirgüç-Kunt, A. & Huizinga, H. (2010). Bank activity and funding strategies: The impact on risk and return. Journal of Financial Economics, 98(3), 626-650.
Demirgüç-Kunt, A., Laeven, L., & Levine, R. (2004). Regulations, market structure, institutions, and the cost of financial intermediation. Journal of Money, Credit, and Banking, 36(3), 593-622.
Deng, S. & Elyasiani, E. (2008). Geographic diversification, bank holding company value, and risk. Journal of Money, Credit and Banking, 40(6), 1217-1238.
DeYoung, R. & Rice, T. (2004). Non-interest income and financial performance at U.S. commercial banks. The Financial Review, 39(1), 101-127.
Elsas, R., Hackethal, A. & Holzhäuser, M. (2010). The anatomy of bank diversification. Journal of Banking and Finance, 34(6), 1274-1287.
Fang, Y., Hasan, I., & Marton, K. (2011). Institutional development and its impact on the performance effect of bank diversification: Evidence from transition economies. Emerging Markets Finance and Trade, 47(4), 5-22.
Fiordelisi, F., Marques-Ibanez, D., & Molyneux, P. (2011). Efficiency and risk in European banking. Journal of Banking and Finance, 35(5), 1315-1326.
Garza-García, J. (2012). Does market power influence bank profits in Mexico? A study on market power and efficiency. Applied Financial Economics, 22(1), 21-32.
Gelos, G. (2009). Banking spreads in Latin America. Economic Inquiry, 47(4), 796-814.
Girma, S. & Shortland, A. (2008). The political economy of financial development. Oxford Economic Papers, 60(4), 567-596.
Goddard, J., McKillop, D., & Wilson, J. (2008). The diversification and financial performance of US credit unions. Journal of Banking and Finance, 32(9), 1836-1849.
Goddard, J., Molyneux, P., & Wilson, J. (2004). The profitability of European banks: A cross-sectional and dynamic panel analysis. The Manchester School, 72(3), 363-381.
Gregoire, J. & Mendoza, M. (1990). Estructura del mercado financiero. Estudios de Economía, 17(1), 57-70.
Guillén, J., Rengifo, E., & Ozsoz, E. (2014). Relative power and efficiency as a main determinant of banks’ profitability in Latin America. Borsa Istanbul Review, 14(2), 119-125.
Gul, S., Irshad, F., & Zaman, K. (2011). Factors affecting bank profitability in Pakistan. The Romanian Economic Journal, 14(39), 61-87.
Jara, M., Arias, J., & Rodriguez, A. (2014). Determinants of bank performance: Evidence for Latin America. Academia Revista Latinoamericana de Administración, 27(2), 164-182.
King, R. & Levine, R. (1993). Finance and growth: Schumpeter might be right. The Quarterly Journal of Economics, 108(3), 717-737.
Klein, M. (1971). A theory of the banking firm. Journal of Money, Credit and Banking, 3(2), 205-218.
Lee, C., Hsieh, M., & Yang, S. (2014). The relationship between revenue diversification and bank performance: Do financial structures and financial reforms matter? Japan and the World Economy, 29, 18-35.
Lepetit, L., Nys, E., Rous, P., & Tarazi, A. (2008). Bank income structure and risk: An empirical analysis of European banks. Journal of Banking and Finance, 32(8), 1452-1467.
Martínez-Peria, M. & Mody, A. (2004). How foreign participation and market concentration impact bank spreads: Evidence from Latin America. Journal of Money, Credit and Banking, 36(3), 511-537.
Marcelin, I. & Mathur, I. (2014). Financial development, institutions and banks. International Review of Financial Analysis, 31, 25-33.
Maudos, J. & Fernández de Guevara, J. (2004). Factors explaining the interest margin in the banking sectors of the European Union. Journal of Banking and Finance, 28(9), 2259-2281.
Maudos, J. & Solís, L. (2009). The determinants of net interest income in the Mexican banking system: An integrated model. Journal of Banking and Finance, 33(10), 1920-1931.
Mercieca, S., Schaeck, K., & Wolfe, S. (2007). Small European banks: Benefits from diversification? Journal of Banking and Finance, 31(7), 1975-1998.
Meslier, C., Tacneng, R., & Tarazi, A. (2012). Bank diversification, risk and profitability in an emerging economy with regulatory asset structure constraints: Evidence from the Philippines. Université de Limoges (working paper).
Mirzaei, A., Moore, T., & Liu, G. (2013). Does market structure matter on banks’ profitability and stability? Emerging vs. advanced economies. Journal of Banking and Finance, 37(8), 2920-2937.
Molyneux, P. & Thornton, J. (1992). Determinants of European bank profitability: A note. Journal of Banking and Finance, 16(6), 1173-1178.
Montes, G., de Mendonça, H., & Oliveira, D. (2016). Sovereign credit ratings in developing economies: New empirical assessment. International Journal of Finance and Economics, 21(4), 382-397.
Monti, M. (1972). Deposit, credit, and interest rate determination under alternative bank objectives. In G. P. Szego & K. Shell (Eds.), Mathematical methods in investment and finance (pp. 431–454). Amsterdam: North- Holland.
Revell, J. (1979). Inflation and financial institutions. London: Financial Times.
Roe, M. & Siegel, J. (2011). Political instability: Effects on financial development, roots in the severity of economic inequality. Journal of Comparative Economics, 39(3), 279-309.
Sanya, S. & Wolfe, S. (2011). Can banks in Emerging economies benefit from revenue diversification? Journal of Financial Services Research, 40(1-2), 79-101.
Shepherd, W. (1983). Economies of scale and monopoly profits. In J. Craven (Ed.). Industrial organization, antitrust, and public policy (pp. 165-204). Dordrecht: Springer.
Smirlock, M. (1985). Evidence of the (non) relationship between concentration and profitability in banking. Journal of Money, Credit and Banking, 17(1), 69-83.
Staikouras, C. & Wood, G. (2004). The determinants of European bank profitability. International Business and Economics Research Journal, 3(6), 57-68.
Stiglitz, J. & Weiss, A. (1981). Credit rationing in markets with imperfect information. The American Economic Review, 71(3), 393-410.
Stiroh, K. (2004a). Do community banks benefit from diversification? Journal of Financial Service Research, 25(2-3), 135-160.
Stiroh, K. (2004b). Diversification in banking: Is noninterest income the answer? Journal of Money, Credit and Banking, 36(5), 853-882.
Stiroh, K. (2006). New evidence on the determinants of bank risk. Journal of Financial Services Research, 30(3), 237-263.
Stiroh, K. & Rumble, A. (2006). The dark side of diversification: The case of US financial holding companies. Journal of Banking and Finance, 30(8), 2131-2161.
Tregenna, F. (2009). The fat years: The structure and profitability of the US banking sector in the pre-crisis period. Cambridge Journal of Economics, 33(4), 609-632.
Williams, B. (2003). Domestic and international determinants of bank profits: foreign banks in Australia. Journal of Banking and Finance, 27, 1185-1210.
Yahya, A., Akhtar, A., & Tabash, M. (2017). The impact of political instability, macroeconomic and bank-specific factors on the profitability of Islamic banks: An empirical evidence. Investment Management and Financial Innovations, 14(4), 30-39.
Zhang, J., Jiang, C., Baozhi, Q., & Wang, P. (2013). Market concentration, risk-taking, and bank performance: Evidence from emerging economies. International Review of Financial Analysis, 30, 149-157.
Amediku, J. (2012). The impact of income diversification on bank performance: A case study of Zenith bank, Cal bank and Unibank (master degree thesis). Kwame Nkrumah University of Science and Technology.
Arellano, M. & Bover, O. (1995). Another look at the instrumental variable estimation of error-components models. Journal of Econometrics, 68(1), 29-51.
Athanasoglou, P., Brissimis, S., & Delis, M. (2008). Bank-specific, industry specific and macroeconomic determinants of bank profitability. Journal of International Financial Markets, Institutions and Money, 18(2), 121-136.
Baele, L., De Jonghe, O., & Vander-Vennet, R. (2007). Does the stock market value bank diversification? Journal of Banking and Finance, 31(7), 1999-2023.
Beck, T., Demirgüç-Kunt, A. & Levine, R. (2006). Bank concentration, competition and crises: First results. Journal of Banking and Finance, 30, 1581-1603.
Behname, M. (2012). The compare of concentration and efficiency in banking industry: Evidence from the OPEC countries. Eurasian Journal of Business and Economics, 5(10), 15-24.
Ben, S. & Plihon, D. (2011). Revenue diversification in emerging market banks: Implications for financial performance, working paper. hal-00598136v2.
Berger, A. (1995). The profit-structure relationship in banking-tests of market-power and efficient-structure hypotheses. Journal of Money, Credit and Banking, 27(2), 404-431.
Berger, A., & Hannan, T. (1998). The efficiency cost of market power in the banking industry: A test of the “quiet life” and related hypotheses. Review of Economics and Statistics, 80(3), 454-465.
Berger, A., Klapper, L., & Rima, T. (2009). Bank competition and financial stability. Journal of Finance Service Research, 35, 99-118.
Berger, A., Hasan, I., & Zhou, M. (2010). The effects of focus versus diversification on bank performance: Evidence from Chinese banks. Journal of Banking and Finance, 34(7), 1417-1435.
Bikker, J. & Hu, H. (2002). Cyclical patterns in profits, provisioning and lending of banks and procyclicality of the new Basel capital requirements. PSL Quarterly Review, 55(221), 143-175.
Bourke, P. (1989). Concentration and other determinants of bank profitability in Europe, North America and Australia. Journal of Banking and Finance, 13(1), 65-79.
Boyd, J. & De Nicoló, D. (2005). The theory of bank risk taking and competition revisited. The Journal of Finance, 60(3), 1329-1343.
Carbó, S. & Rodríguez, F. (2007). The determinants of bank margins in European banking. Journal of Banking and Finance, 31(7), 2043-2063.
Chen, S. & Liao, C. (2011). Are foreign banks more profitable than domestic banks? Home- and host-country effects of banking market structure, governance, and supervision. Journal of Banking and Finance, 35(4), 819-839.
Chiorazzo, V., Milani, C., & Salvini, F. (2008). Income diversification and bank performance: Evidence from Italian banks. Journal of Financial Services Research, 33(3), 181-203.
Chortareas, G., Garza-Garcia, J., & Girardone, C. (2011). Banking sector performance in Latin America: Market power versus efficiency. Review of Development Economics, 15(2), 307-325.
De Jonghe, O. (2010). Back to the basics in banking? A micro-analysis of banking system stability. Journal of Financial Intermediation, 19(3), 387-417.
Demirgüç-Kunt, A. & Huizinga, H. (1999). Determinants of commercial bank interest margins and profitability: Some international evidence (English). The World Bank Economic Review, 13(2), 379-408.
Demirgüç-Kunt, A. & Huizinga, H. (2000). Financial structure and bank profitability. Policy Research Working Paper Series No. 2430. Washington, D. C.: The World Bank.
Demirgüç-Kunt, A. & Huizinga, H. (2010). Bank activity and funding strategies: The impact on risk and return. Journal of Financial Economics, 98(3), 626-650.
Demirgüç-Kunt, A., Laeven, L., & Levine, R. (2004). Regulations, market structure, institutions, and the cost of financial intermediation. Journal of Money, Credit, and Banking, 36(3), 593-622.
Deng, S. & Elyasiani, E. (2008). Geographic diversification, bank holding company value, and risk. Journal of Money, Credit and Banking, 40(6), 1217-1238.
DeYoung, R. & Rice, T. (2004). Non-interest income and financial performance at U.S. commercial banks. The Financial Review, 39(1), 101-127.
Elsas, R., Hackethal, A. & Holzhäuser, M. (2010). The anatomy of bank diversification. Journal of Banking and Finance, 34(6), 1274-1287.
Fang, Y., Hasan, I., & Marton, K. (2011). Institutional development and its impact on the performance effect of bank diversification: Evidence from transition economies. Emerging Markets Finance and Trade, 47(4), 5-22.
Fiordelisi, F., Marques-Ibanez, D., & Molyneux, P. (2011). Efficiency and risk in European banking. Journal of Banking and Finance, 35(5), 1315-1326.
Garza-García, J. (2012). Does market power influence bank profits in Mexico? A study on market power and efficiency. Applied Financial Economics, 22(1), 21-32.
Gelos, G. (2009). Banking spreads in Latin America. Economic Inquiry, 47(4), 796-814.
Girma, S. & Shortland, A. (2008). The political economy of financial development. Oxford Economic Papers, 60(4), 567-596.
Goddard, J., McKillop, D., & Wilson, J. (2008). The diversification and financial performance of US credit unions. Journal of Banking and Finance, 32(9), 1836-1849.
Goddard, J., Molyneux, P., & Wilson, J. (2004). The profitability of European banks: A cross-sectional and dynamic panel analysis. The Manchester School, 72(3), 363-381.
Gregoire, J. & Mendoza, M. (1990). Estructura del mercado financiero. Estudios de Economía, 17(1), 57-70.
Guillén, J., Rengifo, E., & Ozsoz, E. (2014). Relative power and efficiency as a main determinant of banks’ profitability in Latin America. Borsa Istanbul Review, 14(2), 119-125.
Gul, S., Irshad, F., & Zaman, K. (2011). Factors affecting bank profitability in Pakistan. The Romanian Economic Journal, 14(39), 61-87.
Jara, M., Arias, J., & Rodriguez, A. (2014). Determinants of bank performance: Evidence for Latin America. Academia Revista Latinoamericana de Administración, 27(2), 164-182.
King, R. & Levine, R. (1993). Finance and growth: Schumpeter might be right. The Quarterly Journal of Economics, 108(3), 717-737.
Klein, M. (1971). A theory of the banking firm. Journal of Money, Credit and Banking, 3(2), 205-218.
Lee, C., Hsieh, M., & Yang, S. (2014). The relationship between revenue diversification and bank performance: Do financial structures and financial reforms matter? Japan and the World Economy, 29, 18-35.
Lepetit, L., Nys, E., Rous, P., & Tarazi, A. (2008). Bank income structure and risk: An empirical analysis of European banks. Journal of Banking and Finance, 32(8), 1452-1467.
Martínez-Peria, M. & Mody, A. (2004). How foreign participation and market concentration impact bank spreads: Evidence from Latin America. Journal of Money, Credit and Banking, 36(3), 511-537.
Marcelin, I. & Mathur, I. (2014). Financial development, institutions and banks. International Review of Financial Analysis, 31, 25-33.
Maudos, J. & Fernández de Guevara, J. (2004). Factors explaining the interest margin in the banking sectors of the European Union. Journal of Banking and Finance, 28(9), 2259-2281.
Maudos, J. & Solís, L. (2009). The determinants of net interest income in the Mexican banking system: An integrated model. Journal of Banking and Finance, 33(10), 1920-1931.
Mercieca, S., Schaeck, K., & Wolfe, S. (2007). Small European banks: Benefits from diversification? Journal of Banking and Finance, 31(7), 1975-1998.
Meslier, C., Tacneng, R., & Tarazi, A. (2012). Bank diversification, risk and profitability in an emerging economy with regulatory asset structure constraints: Evidence from the Philippines. Université de Limoges (working paper).
Mirzaei, A., Moore, T., & Liu, G. (2013). Does market structure matter on banks’ profitability and stability? Emerging vs. advanced economies. Journal of Banking and Finance, 37(8), 2920-2937.
Molyneux, P. & Thornton, J. (1992). Determinants of European bank profitability: A note. Journal of Banking and Finance, 16(6), 1173-1178.
Montes, G., de Mendonça, H., & Oliveira, D. (2016). Sovereign credit ratings in developing economies: New empirical assessment. International Journal of Finance and Economics, 21(4), 382-397.
Monti, M. (1972). Deposit, credit, and interest rate determination under alternative bank objectives. In G. P. Szego & K. Shell (Eds.), Mathematical methods in investment and finance (pp. 431–454). Amsterdam: North- Holland.
Revell, J. (1979). Inflation and financial institutions. London: Financial Times.
Roe, M. & Siegel, J. (2011). Political instability: Effects on financial development, roots in the severity of economic inequality. Journal of Comparative Economics, 39(3), 279-309.
Sanya, S. & Wolfe, S. (2011). Can banks in Emerging economies benefit from revenue diversification? Journal of Financial Services Research, 40(1-2), 79-101.
Shepherd, W. (1983). Economies of scale and monopoly profits. In J. Craven (Ed.). Industrial organization, antitrust, and public policy (pp. 165-204). Dordrecht: Springer.
Smirlock, M. (1985). Evidence of the (non) relationship between concentration and profitability in banking. Journal of Money, Credit and Banking, 17(1), 69-83.
Staikouras, C. & Wood, G. (2004). The determinants of European bank profitability. International Business and Economics Research Journal, 3(6), 57-68.
Stiglitz, J. & Weiss, A. (1981). Credit rationing in markets with imperfect information. The American Economic Review, 71(3), 393-410.
Stiroh, K. (2004a). Do community banks benefit from diversification? Journal of Financial Service Research, 25(2-3), 135-160.
Stiroh, K. (2004b). Diversification in banking: Is noninterest income the answer? Journal of Money, Credit and Banking, 36(5), 853-882.
Stiroh, K. (2006). New evidence on the determinants of bank risk. Journal of Financial Services Research, 30(3), 237-263.
Stiroh, K. & Rumble, A. (2006). The dark side of diversification: The case of US financial holding companies. Journal of Banking and Finance, 30(8), 2131-2161.
Tregenna, F. (2009). The fat years: The structure and profitability of the US banking sector in the pre-crisis period. Cambridge Journal of Economics, 33(4), 609-632.
Williams, B. (2003). Domestic and international determinants of bank profits: foreign banks in Australia. Journal of Banking and Finance, 27, 1185-1210.
Yahya, A., Akhtar, A., & Tabash, M. (2017). The impact of political instability, macroeconomic and bank-specific factors on the profitability of Islamic banks: An empirical evidence. Investment Management and Financial Innovations, 14(4), 30-39.
Zhang, J., Jiang, C., Baozhi, Q., & Wang, P. (2013). Market concentration, risk-taking, and bank performance: Evidence from emerging economies. International Review of Financial Analysis, 30, 149-157.