Bank Diversification Strategies Under Market Competition.

This paper explores the impact of market competition on banks' diversification strategies. Through a unique sample of Vietnamese commercial banks during 2007 to 2021, our most important finding is that the bank competition impact may depend on the specific type of diversification under analysis. Specifically, we document that banks are more likely to diversify their asset portfolios and income sources into non-lending activities and non-interest revenues amid high competition. In contrast, loan portfolios of banks facing more competition tend to be less diversified across different economic sectors. Besides, funding diversity in another vein may not react to changes in the banking market structure. Further empirical results reveal that the influence of market competition on bank business models is more pronounced at smaller and riskier banks, suggesting that a competitive market places greater pressure on more vulnerable banks and causes them to adopt a more aggressive diversification strategy. Based on these findings, critical policy implications include the development of frameworks to guide banks' activity diversification strategies, monitoring sectoral concentration risks, and providing targeted support and guidance for specific groups of banks, particularly smaller and riskier institutions, within a competitive banking environment. Plain language summary: The impact of market competition on bank diversification strategies This paper explores the impact of market competition on banking diversification strategies. We simultaneously incorporate structural (market concentration) and non-structural approaches to establish the measurement of competition, as any analysis relying on only one competition measure could be misleading. Unlike prior research, we comprehensively analyze different dimensions of bank diversification from asset, funding, income, and sectoral loan portfolios. Through a unique sample of Vietnamese commercial banks from 2007 to 2021, our most important finding is that the bank competition impact may depend on the specific type of diversification under analysis. Specifically, we document that banks are more likely to diversify their asset portfolios and income sources into non-lending activities and non-interest revenues amid high competition. In contrast, loan portfolios of banks facing more competition tend to be less diversified across different economic sectors. Besides, funding diversity in another vein may not react to changes in the banking market structure. Our results not only survive after alternative econometric strategies and subsample analysis but are also robust to a series of modifications in the bank diversification and competition measurements. We further ask whether bank-level heterogeneity matters to the impact of market competition on bank diversification. The empirical results reveal that the influence of market competition on bank business models is more pronounced at smaller and riskier banks, suggesting that a competitive market places greater pressure on more vulnerable banks and causes them to adopt a more aggressive diversification strategy. [ABSTRACT FROM AUTHOR]