The Diversification Dilemma

This paper investigates the effects of income and asset diversification on the performance and risk profiles of banks in the CIS using individual bank-level data spanning 2010 to 2024. We consider robust panel regression methods and incorporate the Generalized Method of Moments (GMM) framework with dynamic panels. Past research and theories suggest that diversification affects banking performance through intermediate mechanisms, such as motivating economic agents to have certain behaviours or through how banking behaviour is shaped by market power. We also consider more conceptual mechanisms, such as systemic asset similarities across banks as a consequence of diversification. As highlighted by the CIS-specific context introduced by Sharipova (2015) and CIS-focused empirical studies such as Djalilov et al. (2016), it is crucial to account for macroeconomic, bank-level, regulatory and/or governance, and market power measures to obtain more robust and relevant results. Ultimately, our results indicate that income or asset diversity lacks a significant effect on risk or performance. This result is observed when splitting banks by ownership or assessing the asset similarity channel of effect. Interestingly, CIS managers’ incentives appear to prevent agency conflict, rather than create it, disputing Acharya (2006). This is seen from the significance of the central banking authority, external macroeconomic shocks, and persistence in influencing performance. Interestingly, these results could indicate that CIS banks approach diversification and risk differently than their Western counterparts. With some evidence of developmental difference (Sharipova, 2015), we recommend further investigation into the factors driving managerial decision-making across the CIS and its variance between ownership structure.