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Bank Income Diversification, Asset Correlation and Systemic Risk
Author(s) -
Lee ChienChiang,
Chen PeiFen,
Zeng JhihHong
Publication year - 2020
Publication title -
south african journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.502
H-Index - 31
eISSN - 1813-6982
pISSN - 0038-2280
DOI - 10.1111/saje.12235
Subject(s) - systemic risk , diversification (marketing strategy) , business , asset (computer security) , nexus (standard) , financial system , non performing asset , economics , finance , capital asset pricing model , financial crisis , macroeconomics , computer security , marketing , computer science , embedded system
This paper explores whether the asset correlations among the non‐interest activities of banks are the key causes for enhancing the bank diversification‐systemic risk nexus. Our empirical evidence indicates that banks' income diversification significantly raises systemic risk. After removing those banks with high asset correlations, the effect of individual banks' diversification on banking systemic risk turns insignificant or even inverse. The results show that high asset correlations among banks could introduce bank failures, thereby leading to higher systemic risk in the financial sector.