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Bank Income Diversification, Asset Correlation and Systemic Risk

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  • Chien‐Chiang Lee
  • Pei‐Fen Chen
  • Jhih‐Hong Zeng

Abstract

This paper explores whether the asset correlations among the non‐interest activities of banks are the key causes for enhancing the bank diversification‐systemic risk nexus. Our empirical evidence indicates that banks' income diversification significantly raises systemic risk. After removing those banks with high asset correlations, the effect of individual banks' diversification on banking systemic risk turns insignificant or even inverse. The results show that high asset correlations among banks could introduce bank failures, thereby leading to higher systemic risk in the financial sector.

Suggested Citation

  • Chien‐Chiang Lee & Pei‐Fen Chen & Jhih‐Hong Zeng, 2020. "Bank Income Diversification, Asset Correlation and Systemic Risk," South African Journal of Economics, Economic Society of South Africa, vol. 88(1), pages 71-89, March.
    • Handle: RePEc:bla:sajeco:v:88:y:2020:i:1:p:71-89
    DOI: 10.1111/saje.12235
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