Chang-Gung University, National Chiao Tung University.
Abstract:
We set out in this study to examine the impact of functional diversification on net interest margins for a sample of commercial banks operating in Asia, employing an endogenous switching regression model to categorize banks into regimes of high and low degrees of diversification. Our results show that the findings of the prior studies only hold when the banks are in a low degree of diversification regime. We also find that for functionally-diversified banks, net interest margins may be less sensitive to fluctuations in bank risk factors than those of specialized banks, which implies that banks can successfully reduce the shock of idiosyncratic risk on their profitability by diversifying income sources.
