The Effect of Income Diversification on Bank Risk: Evidence from China

Using the panel data for sixty-two main Chinese commercial banks during 1997-2012, this paper studies the effect of income diversification on bank risk. According to portfolio theory, the overall risk of banks is decomposed in order to further investigate the contribution of noninterest income. The empirical results show that there is no significant relationship between income diversification and bank risk. The reduction of overall risk is attributed to the significant reduction in the risk of interest income business. While the proportion of noninterest income increases, its volatility also increases, and thus its contribution to overall risk increases. Accordingly, some policy suggestions on the future development of income diversification strategy are proposed.