Bank risk shifting and diversification in an emerging market
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.
Keywordsbank risk interest income non-interest expense diversification non-interest income Vietnam
- Boyd, J., Hanweck, G. and Pithyachariyakul, P. (1980) Bank holding company diversification. In: Proceedings from a conference on bank structure and competition, may. Federal Reserve Bank of Chicago: (pp. 105–120).Google Scholar
- Kwan, S. (1998), Securities activities by commercial banking firms’ section 20 subsidiaries: Risk, return and diversification benefits. In: Economic research, Federal Reserve Bank of San Francisco.Google Scholar
- Puri, M. (1996) Conflicts of interest, intermediation, and the pricing of underwritten securities. Mimeo, Graduate School of Business. Stanford University, Mars Google Scholar
- Rajan, R. (1991) Conflict of interest and the separation of commercial and investment banking, Working Paper. University of Chicago Google Scholar
- Saunders, A., and Walter, I. (1994) Universal Banking in the United States: What Could We Gain? What Could We Lose?. Oxford : Oxford University Press.Google Scholar