The Infl uence of Income Diversifi cation and Financial Liberalization on the Performance and Risk of Commercial Banks

Abstract

The potential diversifi cation benefi t is one of the reasons why China’s commercial banks provide diversifi ed fi nancial services, and is the key issue for commercial banks in their strategic choice and facing fi erce competition. The model test results based on the relevant data of 39 commercial banks in China from 2007 to 2014 show that diversifi cation has a multi-dimension-al relationship with bank performance and risk under the condition of frequent fi nancial reform measures. Diversifi cation can improve the performance of large commercial banks, but may increase their bankruptcy risk. It will increase the credit risk of medium-sized commercial banks, and has little impact on small-scale regional commercial banks. Under the circumstances of insuffi cient economic growth momentum and gradual liberalization of fi nancial markets, banks of diff erent sizes should choose diff erent diversifi ed fi nancial services to cope with the impact of changes in the credit scale of fi nancial markets and the reduction of net interest margin between deposits and loans.