Financial crisis and diversification strategies: The impact on bank risk, and performance

This paper explores the impacts of asset, funding, and income diversification strategies and their combinations on the banking system's performance and risk in Vietnam. Dynamic models, using two-step difference-GMM with panel data collected from 34 Vietnamese commercial banks from 2005 to 2019, are employed. Results indicate that, in general, diversification practices in banking sectors are effective in improving banks' risk-return profile, especially during the Vietnamese banking crisis from 2011 to 2014. However, using them in combinations is only effective for income and funding diversifications. These results are robust regarding the use of alternative measures of diversification level. Based on the findings, managers and government agencies in the Vietnamese banking sectors could be informed about the diversification strategy effectiveness to aid their strategic decisions on operations, investments, and financing.