The Diversification Strategy of European Banks: Determinants and Effects on Efficiency and Profitability

Abstract

The paper addresses the question of diversification in the banking sector. The need to look closely at the determining factors and economic effects of diversification in the financial sector stems from two main types of reasons. Firstly, banking diversification is taking on an increasingly important role, the magnitude of which is difficult to assess without first defining and classifying the main business areas of financial intermediation. Secondly, the expansion of banks' activity towards insurance services and the securities industry has important implications in terms of the concentration and stability of financial systems. The paper has two main aims. The first is to define the phenomenon of European banks' diversification more precisely, while at the same time mapping the considerable range of financial products and services with relation to the main business areas. The second aim is to analyse the economic factors which explain the European banks' diversification and at the same time to evaluate the main implications of this process in terms of concentration, profitability and efficiency. In line with this objective, attention will be turned to the distinction between external and internal factors guiding the activity choices of large European banks. Consideration will be given to the effects of the changes in the demand for financial services on banks' diversification. In examining the internal factors, we will consider economies of scale and scope as well as the effects of diversification on banks' overall efficiency. The comparative analysis between the European banking systems will be developed through the use of a number of databases such as "Bank Profitability" and "Ibca-Bankscope", while the analysis of the strategic behaviours of the Global Player will be developed using documentary material and annual reports.