The effect of revenue diversification on bank profitability and risk during the COVID-19 pandemic

Xingjian Li; Hongrui Feng; Sebastian Zhao; David A Carter

doi:10.1016/j.frl.2021.101957

The effect of revenue diversification on bank profitability and risk during the COVID-19 pandemic

Financ Res Lett. 2021 Nov:43:101957. doi: 10.1016/j.frl.2021.101957. Epub 2021 Feb 5.

Authors

Xingjian Li¹, Hongrui Feng², Sebastian Zhao³, David A Carter⁴

Affiliations

¹ College of Economics, Zhejiang University, Hangzhou, China.
² Department of Finance, Black School of Business, Penn State Behrend, Erie, PA 16563, USA.
³ AP Research, Penn State Behrend, Erie, PA 16563, USA.
⁴ Department of Finance, Spears School of Business, Oklahoma State University, Stillwater, OK 74078, USA.

Abstract

Banks can potentially reduce the variability of their revenue by diversifying beyond traditional lending activities into noninterest revenue sources. We investigate the effect of the COVID-19 pandemic on the relation between the use of noninterest income and bank profit and risk. The economic effect of the pandemic resulted in tightened credit standards and reduced demand for many types of loans. We find that noninterest revenue sources are positively related to performance but inversely related to risk. These results are consistent with a beneficial diversification effect during the pandemic from banks expanding beyond traditional lending sources of revenue.

Keywords: Banks; COVID-19; Risk; noninterest income; profit.