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

• DOI: http://doi.org/10.1111/irfi.12078
• Published date: 01 September 2016
• Date: 01 September 2016
• Author: Ali Mirzaei,Ali M Kutan

Does Bank Diversification Improve

Output Growth? Evidence from the

Recent Global Crisis

ALI MIRZAEI

†

AND ALI MKUTAN

‡

†

Finance Department, School of Business Administration, American University of

Sharjah, Sharjah, United Arab Emirates and

‡

Southern Illinois University Edwardsville, Edwardsville, USA

ABSTRACT

This study examines whether the diversity of activities conducted by the bank-

ing sector in the years approaching the recent global financial crisis alleviated

the adverse impact of the crisis. Using data for 28 industries in 66 countries,

we find that bank diversification has strengthened country resilience to the

crisis, as measured by industry growth over the period 2008–2009. However,

we find that while both bank-based and market-based economies have been

affected negatively by the crisis, the contribution of bank diversification in

mitigating the real impact of the crisis is pronounced only in bank-based econ-

omies. Overall, our findings suggest that countries with significant bank diver-

sification have also been the most resilient to the recent global crisis.

JEL Codes: G01; G21; E44

I. INTRODUCTION

The recent financial 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 financial) 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 financial channels, the role of financial 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 diversification. Diversi-

fied and focused business models may transmit systemic financial 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 financial

crisis alleviated the adverse impact.

© 2016 International Review of Finance Ltd. 2016

International Review of Finance, 16:3, 2016: pp. 467–481

DOI:10.1111/irfi.12078