Toward a more resilient financial system: Should banks be diversified?

Abstract

This article empirically analyzes the effects of revenue diversification on the profitability and risk of a large sample of Eurozone banks over the period from 2000 to 2012. We use the generalized method of moments (GMM) estimator, which is also referred to as the system-GMM estimator. We conclude that higher income diversification favors bank profitability. However, our study does not find a significant relationship between revenue diversification and bank risk, even when considering a crisis period. Our results suggest that establishing restrictions in the universal banking model could damage the resilience of the financial system, and thus affect the sustainability of the uneven economic recovery in Europe.