The influence of bank diversification strategies on systemic risk contribution. Do conventional and Islamic bank business models matter?

Purpose This study aims to examine how income, assets and funding diversification affect bank systemic risk contribution in conventional and Islamic banks in Indonesia. Design/methodology/approach Fixed effects-panel least squares regression analysis of quarterly Indonesian banking data (2016–2022), measuring systemic risk contribution (ΔCoVaR) across three diversification strategies in conventional and Islamic banks. Findings The empirical results reveal that income diversification increased systemic risk contribution in Indonesian banks, while funding diversification reduced it, and asset diversification showed no effect. Surprisingly, Islamic banks mirrored conventional banks’ risk patterns, attributable to Indonesia’s unique banking system, where their origins as Sharia business units within conventional banks later spun off or converted into standalone Islamic banks. The COVID-19 pandemic structurally transformed diversification effects, reversing protective benefits and amplifying systemic risk. Two-step System GMM robustness checks confirmed the reliability of these findings. Research limitations/implications The study period excludes earlier crises; future research should incorporate multiple crisis periods and cross-country data to strengthen generalizability. Practical implications Effective regulatory oversight should include careful evaluation of banks’ diversification strategies, proactive support for funding diversity and ensure protective measures are strong enough to withstand extreme financial shocks. Originality/value To the best of the authors’ knowledge this is the first study to simultaneously analyze all three diversification dimensions on systemic risk contribution effects in both conventional and Islamic banking systems, with novel findings about Islamic banks’ nonmoderating role and COVID-19’s amplifying impact.