The impact of financial crisis on bank income diversification

Abstract

Using data of 3,695 commercial banks from 142 countries over the period 2002- 2021, our OLS
estimates with multiple fixed effects and two-stage least squares approach provide evidence that banking crisis
significantly increases the level of bank income diversification, especially large banks. As the business model
of small banks focuses on traditional lending activities, income diversification of small banks is not affected by
banking crisis. Currency crisis and sovereign debt crisis are not significant drivers of bank income diversification.
Tightening regulations on bank activity restrictions and capital stringency helps to cushion the impact of financial
crises on bank income diversification. Our findings provide a comprehensive view of the impact of financial crisis
on bank income diversification as well as the roles of some bank regulations in times of financial crisis. Some
policy implications are also provided for policymakers to implement appropriate policies that reduce bank risktaking during periods of financial crisis.