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Banks' Diversification, Cross-Selling And The Quality Of Banks' Loans

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  • STEFANIA COSCI
  • VALENTINA MELICIANI
  • VALENTINA SABATO

Abstract

In this paper we model and empirically test the impact of banks' shift towards financial services on their screening activity and on the quality of their loans. We present a model where it is easier to sell services to positively evaluated loan applicants and we show that the larger the banks' income from services, the lower their optimal screening effort. This prediction is consistent with the empirical evidence based on a panel of European banks and showing that the quality of banks' loans decreases with the share of commission income (a proxy for income from services). Copyright © 2009 The Authors. Journal compilation © 2009 Blackwell Publishing Ltd and The University of Manchester.

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  • Stefania Cosci & Valentina Meliciani & Valentina Sabato, 2009. "Banks' Diversification, Cross-Selling And The Quality Of Banks' Loans," Manchester School, University of Manchester, vol. 77(s1), pages 40-65, September.
  • Handle: RePEc:bla:manchs:v:77:y:2009:i:s1:p:40-65
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    References listed on IDEAS

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    1. Gorton, Gary & Rosen, Richard, 1995. " Corporate Control, Portfolio Choice, and the Decline of Banking," Journal of Finance, American Finance Association, vol. 50(5), pages 1377-1420, December.
    2. Allen, Franklin & Santomero, Anthony M., 2001. "What do financial intermediaries do?," Journal of Banking & Finance, Elsevier, vol. 25(2), pages 271-294, February.
    3. Stiroh, Kevin J. & Rumble, Adrienne, 2006. "The dark side of diversification: The case of US financial holding companies," Journal of Banking & Finance, Elsevier, vol. 30(8), pages 2131-2161, August.
    4. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    5. Goddard, John & McKillop, Donal & Wilson, John O.S., 2008. "The diversification and financial performance of US credit unions," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1836-1849, September.
    6. Gehrig, Thomas, 1998. "Screening, cross-border banking, and the allocation of credit," Research in Economics, Elsevier, vol. 52(4), pages 387-407, December.
    7. DeYoung, Robert & Roland, Karin P., 2001. "Product Mix and Earnings Volatility at Commercial Banks: Evidence from a Degree of Total Leverage Model," Journal of Financial Intermediation, Elsevier, vol. 10(1), pages 54-84, January.
    8. Robert DeYoung & Tara Rice, 2004. "Noninterest Income and Financial Performance at U.S. Commercial Banks," The Financial Review, Eastern Finance Association, vol. 39(1), pages 101-127, February.
    9. Cosci Stefania & Meliciani Valentina, 2007. "The role of screening and cross-selling in bank-firm relationships," wp.comunite 0033, Department of Communication, University of Teramo.
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    Cited by:

    1. Zhao, Tianshu & Matthews, Kent & Murinde, Victor, 2013. "Cross-selling, switching costs and imperfect competition in British banks," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5452-5462.
    2. Busch, Ramona & Koziol, Philipp & Mitrovic, Marc, 2015. "Many a little makes a mickle: Macro portfolio stress test for small and medium-sized German banks," Discussion Papers 23/2015, Deutsche Bundesbank.

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