The impact of diversification on risk and stability in Asian banks

This study employs system generalized method of moments (GMM) procedures to explore the impact of asset, income, and funding diversification on the stability and risk-taking of Asian banks, using data from 2000 to 2023. The findings showed that agency theory, portfolio theory, trade-off theory, and the resource-based view provide a basis for the relationships between diversification and banks' stability/risk-taking. The findings reveal that asset diversification enhances the stability of banks and decreases their risk; however, funding diversification decreases that stability and increases their risk in Asia. The results also highlight the benefits of income diversification for banks in Asia, as it enhances their stability and mitigates risk. The results reveal a significant variation in the impact of diversification on the stability and risk-taking of commercial, savings, and Islamic banks. In addition, the findings remain heterogeneous across the other attributes of banks, like capitalization, liquidity, size, and growth. The findings have implication for policymakers and regulators.