Small European banks: Benefits from diversification?

Steve Mercieca, Klaus Schaeck, Simon Wolfe*

*Corresponding author for this work

Research output: Contribution to journalArticle (Academic Journal)

214 Citations (Scopus)

Abstract

Motivated by the liberalisation and harmonisation of financial systems in Europe, we investigate whether the observed shift into non-interest income activities improves performance of small European credit institutions. Using a sample of 755 small banks for the period 1997-2003, we find no direct diversification benefits within and across business lines and an inverse association between non-interest income and bank performance. Our findings are robust to a set of sensitivity analyses using alternative samples and controlling for the regulatory environment. Furthermore, the results provide circumstantial evidence for the presence of economies of scale. The absence of benefits of diversification confirms findings for other banking markets and suggests small European banks enter lines of business where they currently lack expertise and experience. These results have implications for bank supervisors, regulators and bank managers. Crown

Original languageEnglish
Pages (from-to)1975-1998
Number of pages24
JournalJournal of Banking and Finance
Volume31
Issue number7
DOIs
Publication statusPublished - Jul 2007

Keywords

  • Product diversification
  • Risk/return performance
  • Small banks

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