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The universal bank model: Synergy or vulnerability?

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  • Michael Brei
  • Xi Yang

Abstract

In this paper we examine empirically the relationship between banks’ income diversification, expansion into non-traditional activities and performance. Using detailed information on the U.S. banking sector over the period 2002-12, we investigate whether or not banks’ involvement in various business lines has been associated with higher accounting returns and risks. Over the long-term, we find robust evidence that banks’ expansion into non-traditional activities has lacked revenue and diversification benefits: overall risks of non-traditional banks have been higher, while returns were not. A higher degree of diversification across traditional and certain non-traditional activities, on the contrary, has been associated with important risk reduction benefits. The effects are non-linear and differ across business lines, which seems to suggest that an optimal mix of banking activities exists.

Suggested Citation

  • Michael Brei & Xi Yang, 2015. "The universal bank model: Synergy or vulnerability?," EconomiX Working Papers 2015-13, University of Paris Nanterre, EconomiX.
    • Handle: RePEc:drm:wpaper:2015-13
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    Cited by:

    1. Natalia Boliari & Kudret Topyan & Chia-Jane Wang, 2023. "Risk Structure of Banks in Spain: Do BHCs Have Greater Cost of Debt?," Risks, MDPI, vol. 11(10), pages 1-13, October.
    2. Ranjeeta Nayak, 2021. "Banking regulations: do they matter for performance?," Journal of Banking Regulation, Palgrave Macmillan, vol. 22(4), pages 261-274, December.

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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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