The effects of income source diversification on the volatility of banks' profitability

Abstract

Despite exhaustive research that investigates the impact of diversification of the bank's business activities on its performance, there is still no consensus on whether this impact is positive or negative. This paper identifies the advantages and disadvantages of diversification of business activities and sources of income in banking, supported by econometric evidence. The research was conducted on a sample of 20 systemically important banks whose financial performance was monitored in the period 2005-2014. Using the linear regression model, we examined whether the share of non-interest income in total income of the bank directly affects the volatility of its profitability. The research provides practical evidence and contributes to the debate on the advantages and disadvantages of applying the universal banking model.

Keywords

• universal banks
• commercial banks
• income diversification
• volatility of profitability
• non-interest income