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Journal of Financial Services Research

, Volume 33, Issue 3, pp 181–203 | Cite as

Income Diversification and Bank Performance: Evidence from Italian Banks

  • Vincenzo ChiorazzoEmail author
  • Carlo Milani
  • Francesca Salvini
Article

Abstract

Using annual data from Italian banks, we study the link between non-interest revenues and profitability. We find that income diversification increases risk-adjusted returns. Our results provide econometric evidence consistent with current studies on EU banks, but do not support findings on the U.S. experience. In our view, the differences depend primarily on the relative importance of local banks: we find that the relation is stronger at large banks. In addition, we find that there are limits to diversification gains as banks get larger. Small banks can make gains from increasing non-interest income, but only when they have very little non-interest income share to start with. The source of non-interest income is less important than its level.

Keywords

Diversification bank risk bank return non-interest income 

JEL classification

G21 

Notes

Acknowledgment

We are indebted to Riccardo Brogi, Konstantinos Drakos, Marcello Messori, Pier Carlo Padoan, Gianfranco Torriero, and two anonymous referees for their helpful comments. The usual disclaimer applies. We would like to thank Marialuisa Giachetti for her help in the data set acquisition. The opinions expressed in the paper are those of the authors and in no way involve the responsibility of the Italian Banking Association.

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Copyright information

© Springer Science+Business Media, LLC 2008

Authors and Affiliations

  • Vincenzo Chiorazzo
    • 1
    Email author
  • Carlo Milani
    • 1
  • Francesca Salvini
    • 1
  1. 1.Economic Research DepartmentThe Italian Banking AssociationRomeItaly

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