Activity strategies, bank stability and policy uncertainty

This study examines how activity strategies can affect bank stability in times of uncertainty, given the potential benefits and costs of having different lines of business. Our results show consistent evidence that expansion into non-interest income-generating activities may lead banks to become riskier. However, this negative effect is mitigated during times of increased uncertainty, especially for banks with strategies that rely prominently on generating non-interest income. This evidence survives with alternative samples, econometric methods, and measurements of variables. These findings remain robust across samples using alternative measures and empirical models. Further tests reveal that the moderating effect sustains itself across the distribution of banking risk. The evidence suggests a call for an optimal combination of banking activities in the future.