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Bank risk shifting and diversification in an emerging market

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Abstract

This paper investigates risk shifting in commercial banks in the emerging market of Vietnam, where banks fund domestic asset portfolios almost exclusively from deposits and with limited issuance of securities. We investigate the relationship between these banks’ income diversification strategies and their overall level of risk during the recent period of deregulation and global financial crisis. Our results show that those commercial banks that have shifted to non-interest income activities in fact face higher levels of risk. This finding is at odds with theories that argue that diversification is a strategy for risk reduction and has broader implications for domestic system stability. The analysis provides a framework for evaluating these issues in other emerging markets.

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Authors and Affiliations

  1. Department of Banking & Finance, Monash University, Caulfield Campus, PO Box 197, Caulfield East, VIC, 3145, Australia

    Jonathan A. Batten

  2. Faculty of Banking, University of Economics Ho Chi Minh City, Ho Chi Minh City, Vietnam

    Xuan Vinh Vo

  3. CFVG Ho Chi Minh City, 279 Nguyen Tri Phuong Street, District 10, Ho Chi Minh City, Vietnam

    Xuan Vinh Vo

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  1. Jonathan A. Batten
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Correspondence to Jonathan A. Batten.

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Batten, J.A., Vo, X.V. Bank risk shifting and diversification in an emerging market. Risk Manag 18, 217–235 (2016). https://doi.org/10.1057/s41283-016-0008-2

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