The nonlinear impacts of energy price shocks on bank diversification: Evidence from G7 economies

This study examines the impact of energy price shocks on bank diversification in G7 countries using data from 13,225 banks between 1992 and 2021. Applying a two-step system dynamic generalized method of moments estimator, the results show that energy price fluctuations significantly reduce both income and asset diversification. The effect is more pronounced at higher price levels, indicating strong non-linear and asymmetric dynamics: positive shocks decrease diversification, while negative shocks increase it. Results remain robust when accounting for macroeconomic factors, major crises (the 2008 financial crisis and COVID-19), and alternative measures of energy price shocks. Subsample analysis reveals that smaller banks are more vulnerable to energy price volatility due to limited resources and narrower financial margins. These findings highlight the critical exposure of banks to energy markets and underscore the need for policymakers to adopt tailored regulatory measures, such as counter-cyclical capital buffers and enhanced risk management frameworks, to strengthen financial resilience against energy price shocks.