An Empirical Study Of How Business Diversification Influence The Profitability Of Commercial Banks

In recent years,the development of domestic commercial banks is faced with many factors from external constraints,such as the macroeconomic downturn,interest rate liberalization,financial disintermediation,the increase of capital regulatory requirements and other factors,those are forcing banks to accelerate the pace of transformation.Banks should also deal with many challenges,increase their own earnings and enhance their competitiveness among the financial industry,and they must seek breakthroughs constantly.In 2008 after the outbreak of the financial crisis,banks have to expand their businesses and services,with paying more attention to the various operating risk,and avoid some unsystematic risks as soon as possible,and in response to systemic risks,the Basel committee also puts forward more strict constraints on capital regulation rules,which limits the progress of commercial Banks business transformation to a certain degree.Therefore,the banking industry is caught in a dilemma between risk and return.If it pursues profit blindly,it will encounter various uncertain risks,and the occurrence of operational risks will make the bank unable to obtain sustainable profits.However,risk avoidance blindly and over-cautious management will put banks at a competitive disadvantage in the financial market and therefor reduce their profits.In the recent development of the bank,the traditional business management still occupies the large majority share of the business,although non-interest income has increased,it still less than half the non-interest income of similar-sized foreign bank,so in the management strategy transformation and upgrading progress,commercial banks should pay more attention to the diversification development and to seize the commanding point of profits in the diversified management.This leads to the re-thinking of bank diversification: whether all types of commercial Banks are suitable for business diversification or not,whether business priorities should be distinguished in the process of business diversification or not,and how to reduce the risks which can be encountered in the diversification.The impact of banking diversification on profitability is an enduring topic and obviously a topic with practical research significance.But this research topic is always divided in its attitude at home and abroad,because of different personal starting points,the measures of diversification are different also.Therefore,it can obtain the empirical results of the impact of bank diversification on its profitability,obtain scientific conclusions and put forward corresponding policy Suggestions,which will provide very important reference value for bank diversification.This paper analyses the data of 17 Banks from 2007 to 2017,and uses Herfindahl-Hirschman Index method to calculate three indicators which represent the banking business diversification:asset business diversification index,liability business diversification index and off-balance sheet business diversification index.Then,data analysis is carried out for business diversification of different types of Banks.Finally,for study sample,the balance panel data fixed effects model is adopted to empirical test for whole commercial Banks,and the empirical analyse from bank heterogeneity aspect is discussed further.The research results are as following: 1.Under the current business model,the state-owned commercial Banks focus on asset diversification and off-balance-sheet business diversification business,and relatively cautious operating measures are adopted to liabilities;Joint-stock commercial banks pay attention to the diversification of liability business,mainly because the flexibility and innovation of joint-stock commercial Banks has expanded financing channel for themself.Urban commercial Banks paid some attention to the diversification of assets,liabilities and off-balance sheet business.2.The diversification of commercial Banks can increase their profitability.3.The heterogeneity of Banks has an impact on the effect between business diversification and profitability to some extent.4.State-owned commercial Banks are more suitable for the diversification of liability business;The asset business diversification index coefficient and off-balance sheet business diversification index coefficient of joint-stock commercial Banks are both negative,that is,the degree of diversification of asset business and off-balance sheet business has a significant positive impact on bank profitability.The liability business diversification index of urban commercial Banks has a significant negative impact on Banks' profitability,that is,diversified liability business can increase Banks' profitability,so urban commercial Banks are suitable for business diversification.