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Risk and Performance in Emerging Economies: Do Bank Diversification and Financial Crisis Matter?

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  • Syed Moudud-Ul-Huq
  • Changjun Zheng
  • Anupam Das Gupta
  • S. K. Alamgir Hossain
  • Tanmay Biswas

Abstract

This study empirically investigates the quadratic effects of bank diversification, size and global financial crisis on risk-taking behaviour and performance. To unfold those effects, it uses the generalized method of moments (GMM) estimator and also uses an unbalanced panel data set on a large sample consisting of 542 bank-year observations between 2004 and 2015. The key results for emerging economies are as follows: (a) increasingly higher non-performing loan ratio makes the bank underperforming and unstable; (b) benefits derived from bank diversification are heterogeneous and confirms portfolio diversification theory; (c) small-sized banks of Bangladesh ensure higher advantage from portfolio mix over large banks; (d) large banks of South Africa achieve higher benefit from income diversification over small-sized banks; and finally, this study evidences that during the financial crisis, emerging economies can use portfolio diversification as a mechanism for controlling risk and improve bank performance. Mainly, emerging countries can rely on income diversification and should involve this mechanism with systematic risk a great care of.

Suggested Citation

  • Syed Moudud-Ul-Huq & Changjun Zheng & Anupam Das Gupta & S. K. Alamgir Hossain & Tanmay Biswas, 2023. "Risk and Performance in Emerging Economies: Do Bank Diversification and Financial Crisis Matter?," Global Business Review, International Management Institute, vol. 24(4), pages 663-689, August.
    • Handle: RePEc:sae:globus:v:24:y:2023:i:4:p:663-689
    DOI: 10.1177/0972150920915301
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