Does Bank Diversification Improve Output Growth? Evidence from the Recent Global Crisis

Published date01 September 2016
Date01 September 2016
AuthorAli Mirzaei,Ali M Kutan
Does Bank Diversification Improve
Output Growth? Evidence from the
Recent Global Crisis
Finance Department, School of Business Administration, American University of
Sharjah, Sharjah, United Arab Emirates and
Southern Illinois University Edwardsville, Edwardsville, USA
This study examines whether the diversity of activities conducted by the bank-
ing sector in the years approaching the recent global nancial crisis alleviated
the adverse impact of the crisis. Using data for 28 industries in 66 countries,
we nd that bank diversication has strengthened country resilience to the
crisis, as measured by industry growth over the period 20082009. However,
we nd that while both bank-based and market-based economies have been
affected negatively by the crisis, the contribution of bank diversication in
mitigating the real impact of the crisis is pronounced only in bank-based econ-
omies. Overall, our ndings suggest that countries with signicant bank diver-
sication have also been the most resilient to the recent global crisis.
JEL Codes: G01; G21; E44
The recent nancial crisis has affected the performance of the real sector in most
countries. For example, the adverse effects of the crisis on industry growth have
been documented in several studies (Klapper and Love 2011; Laeven and Valencia
2013; Jo 2014; Moore and Mirzaei 2014). Yet, the severity of the crisis is heteroge-
neous across countries. Researchers have highlighted the role of many channels
(e.g., trade and nancial) through which the crisis was spread and which contrib-
uted to its severity (Lane and Milesi-Ferretti 2010; Rose and Spiegel 2011;
Claessens et al. 2012). Among nancial channels, the role of nancial develop-
ment and regulation, and bank market structure in shaping the real effect of
the crisis, has been documented, but not the role of bank diversication. Diversi-
ed and focused business models may transmit systemic nancial crises to the
real economy differently. In this study,we examine whether the diversity of activ-
ities conducted by banking sector in the years leading up to the global nancial
crisis alleviated the adverse impact.
© 2016 International Review of Finance Ltd. 2016
International Review of Finance, 16:3, 2016: pp. 467481

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