brokerage, insurance underwriting and others. Also, arguing that banks are sloppy for
taking the challenges of deregulated ﬁnancial markets (DeYoung and Torna, 2013). In
addition, recent ﬁnancial turmoil has also led banks to shift their traditional interest-based
activities to non-interestactivities. Hence, banks often have diversiﬁed their revenue sources
by performing new operations, such as brokerage and investment banking, underwriting
and trading securities and other activities, that produce non-interest income (Meslier et al.,
2014) and depend on non-interest bearing assets to diversify of portfolio assets. The
implications of such changeson bank risk-taking and performance have recently addressed
for developed countries (the USA and Europe), but tilldate, no consensus has been reached.
Most studies ﬁnd that non-interest activities not only generate a higher return but also
produce extra risk because of their uncertain nature (Stiroh,2004a, 2004b;Stiroh and
Rumble, 2006;Brownand Caylor, 2006;Lepetit et al.,2008).
Very few papers (Sanya and Wolfe, 2011;Pennathur et al.,2012;Nguyen et al.,2012;
Meslier et al.,2014;Zhou, 2014;Khan, 2010;Moudud-Ul-Huq, 2015;Moudud-Ul-Huq et al.,
2018) focus on emerging countriesand ﬁnd somehow different results. The objective of this
study is to contribute to the scarce literature dedicated to the impact of diversiﬁcation on
bank performance and risk-taking behavior in the case of emerging and developing
countries. Such countries have different ﬁnancial systems and market structures and
institutional and regulatory backgrounds, which could elicit disparate impact on bank
performance of creatingnew business lines.
To address the effect of bank diversiﬁcation on performanceand risk nexus in emerging
economies, individually we focus on the ASEAN and BRICS economies. There are two
distinct reasons for selecting the region. First, ASEAN is projected as the ﬁfth largest
trading region in the world by 2020, and BRICS will become the principal engine of the
economy (Wilson and Purushothaman, 2003) and is timely as these regions continue to
take their positions within the global ﬁnancial system. Second, the banking competition in
these regions is becoming more intense due to the increased pace of ﬁnancial openness.
Hence, it is crucial for potential investors who are interested in emerging markets to know
the diversiﬁcation beneﬁt. Notably, focusing on the ﬁve emerging economies from ASEAN
region, that is, Indonesia, Malaysia, the Philippines, Thailand and Vietnam ( “ASEAN-5”)
and BRICS economies enables us to differentiatethe effects of diversiﬁcation in two speciﬁc
regions. Particularly, from the regulatory point of view this study has great implications.
However, he principal function of regulators of the banking industry is to manage banks’
risk, protect the interest of the depositors and facilitate smooth operations in the ﬁnancial
systems. Diversiﬁcation both assets and income are consistent with portfolio investment
theory. Through income diversiﬁcation, banks can generate alternative sources of income
that play a role in the proﬁtability of banks. On the one hand, assets diversiﬁcation also
plays a role in the risk diversiﬁcation through managing probable future income. Thus,
diversiﬁcation plays the silent rolein regulating the risk of banks and smooth operations in
the ﬁnancial system. As diversiﬁcation shows the signiﬁcant adverse impact on bank risk,
diversiﬁcation can be treated as mitigating risk tool of bank risk management. Therefore,
indirectly it is playing a signal to regulators to judge efﬁcient management, operational
ability and risk management capacity of the banking authority. Though the beneﬁt from
diversiﬁcation is heterogeneous across regions, regulators can smoothly guide their banks
for selecting risk-free projects through considering the different segments of income and
boosting non-interestbearing assets where it derives beneﬁt.
This study contributesto the existing literature in the following ways. Speciﬁcally,our data
allow us to differentiate the beneﬁt of noninterest income (commission-based income,
trading income and other income). Moreover, by following Laeven and Levine (2007) and