Income Diversification, Market Structure and Bank Stability: A Cross-country Analysis

Abstract

Using a macro-level dataset covering 173 countries from 2000 to 2020, this study is the first attempt to examine how income diversification and market concentration are related to bank stability. Firstly, we document that bank stability is positively related to revenue diversification, suggesting that banks are more stable when they are more engaged in non-traditional activities. Secondly, market concentration is positively associated with bank stability, in line with the concentration-stability hypothesis that banks in a highly concentrated banking system are more likely to be more stable. Thirdly, we show that market concentration modifies the link between revenue diversification and bank stability. Specifically, it is shown that diversified banks are more stable in a more concentrated environment compared to those on a less concentrated market. These results are robust to multiple regression specifications with different proxies for bank stability and income diversification.