An examination of diversification on bank profitability and insolvency risk in 28 financially liberalized markets

Abstract We seek to resolve the conflicts in the literature by examining the relationship between traditional and non-traditional banking profits, other determinants of bank profitability and the risk-return relationship of banks’ diversification into off-balance sheet activities for a group of commercial banks in twenty-eight countries for the period before and after the financial crisis. Our main finding is that there is a generally inverse relationship between traditional and nontraditional incomes. While noninterest income share enhances bank profits there is a significant negative effect of diversification into off-balance sheet activities on risk-adjusted profits in the period following the global financial crisis. These results have important implications on regulatory and business policies.