Did the COVID-19 pandemic amplify the positive impact of income diversification on the profitability of European banks?





banks, banking income, income diversification, COVID-19


Research background: The contribution of banks? non-interest income to the total income becomes particularly important in the face of a severe financial crisis, usually accompanied by burdensome restrictions in economic activity, insolvencies of enterprises and households and low interest rates of central banks.

Purpose of the article: This study investigates banks in 40 European countries to determine whether non-interest income had a significant impact on the bank?s profitability and whether the severity of the COVID-19 pandemic influences the form of this relationship.

Methods: This study used a linear cross-section model using bank-level data. In the model, the bank?s profitability was regressed with the measure of income diversification, controlling for the pandemic?s intensity and the state of the country?s economy and bank characteristics. Banking data were obtained from the S&P Global MI. The Oxford COVID-19 Government Response Tracker (Hale et al., 2021, pp. 529?538) was the source of pandemic-related variables.

Findings & value added: The obtained results indicate that the increases in non-interest income share in the bank?s total income have a statistically significant positive impact on profitability for the European banking sector. The dependence of profitability on diversification was stronger with the growing adverse effects of the pandemic. Our results are in line with those for the US banks (Li et al., 2021) and the European Central Bank Banking Supervision?s assessment that higher non-interest income has allowed banks? profitability in the euro area to be maintained at a pre-pandemic level (ECB, 2021). In addition, the study contributes to previous literature by testing the impact of the severity of the COVID-19 pandemic on the relationship between income diversification and bank profitability in 40 European countries.


Download data is not yet available.


Abedifar, P., Molyneux, P., & Tarazi, A. (2018). Non-interest income and bank lending. Journal of Banking & Finance, 87(C), 411?426. doi: 10.1016/j.jbankfi n.2017.11.003.

Athanasoglou, P., Brissimis, S. N., & Delis, M. D. (2008). Bank-specific, industry-specific and macroeconomic determinants of bank profitability. International Financial Markets, Institutions and Money, 18, 121?136. doi: 10.1016/j.intfin.2 006.07.001.

Baele, L., De Jonghe, O., & Vennet, R.V. (2007). Does the stock market value bank diversification? Journal of Banking & Finance, 31(7), 1999?2023. doi: 10.1016/j.jbankfin.2006.08.003.

Berger, A., Bonime, S., Covitz, D., & Hancock, D. (2000). Why are bank profits so persistent? The roles of product market competition, informational opacity, and regional/macroeconomic shocks. Journal of Banking and Finance, 24, 1203?1235. doi: 10.1016/S0378-4266(99)00124-7.

Borri, N., & di Giorgio, G. (2021). Systemic risk and the COVID challenge in the European banking sector. Journal of Banking & Finance, 106073. doi: 10.1016 /j.jbankfin.2021.106073.

Busch, R., & Kick, T. (2009). Income diversification in the German banking industry. SSRN Electronic Journal, February. doi: 10.2139/ssrn.1342282.

Calmes, C., & Theoret, R. (2010). The impact of off-balance-sheet activities on banks returns: an application of the ARCH-M to Canadian data. Journal of Banking & Finance, 34(7), 1719?1728. doi: 10.1016/j.jbankfin.2010.03.017.

Calmes, C., & Theoret, R. (2020). Portfolio analysis of big US banks? performance: the fee business lines factor. Journal of Banking Regulation, 22, 112?132. doi: 10.1057/s41261-020-00131-3.

Campa, J., & Kedia, S. (2002). Explaining the diversification discount. Journal of Finance, 57(4), 1731?1762. doi: 10.1111/1540-6261.00476.

Capraru, B., Ihnatov, I., & Pintilie, N. (2020). Competition and diversification in the European banking sector. Research in International Business and Finance, 51, 100963. doi: 10.1016/j.ribaf.2018.09.014.

Catalan, F., di Pietro, F., & Ponce, A. (2021). Post-COVID-19 SME financing constraints and the credit guarantee scheme solution in Spain. Journal of Banking Regulation, 22, 250?260. doi: 10.1057/s41261-021-00143-7.

Cornett, M., Ors, E., & Tehranian, H. (2002). Bank performance around the introduction of a section 20 subsidiary. Journal of Finance, 57(1), 501?521. doi: 10.1111/1540-6261.00430.

Dang, V., & Nguyen, H. (2022). Bank profitability under uncertainty. Quarterly Review of Economics and Finance, 83, 119?134. doi: 10.1016/j.qref.2021.12. 001.

Demsetz, R., & Strahan, P. (1997). Diversification, size, and risk at bank holding companies. Journal of Money, Credit and Banking, 29(3), 300?313. doi: 10.230 7/2953695.

DeYoung, R., & Roland, K. (2001). Product mix and earning volatility at commercial banks: evidence from a degree of leverage model. Journal of Financial Intermediation, 10(1), 54?84. doi: 10.1006/jfin.2000.0305.

DeYoung, R., & Torna, G. (2013). Nontraditional banking activities and bank failures during the financial crisis. Journal of Financial Intermediation, 22(3), 397?421. doi: 10.1016/j.jfi.2013.01.001.

Drucker, S., & Puri, M. (2005). On the benefits of concurrent lending and underwriting. Journal of Finance, 60(6), 2763?2799. doi: 10.1111/j.1540-6261.2005. 00816.x.

ECB (2016). Financial stability review, November 2016. European Central Bank. Retrieved from https://www.ecb.europa.eu/pub/pdf/fsr/financialstabilityreview 201611.en.pdf (02.11.2021).

ECB (2018). Financial stability review, November 2018. European Central Bank. Retrieved from https://www.ecb.europa.eu/pub/pdf/fsr/ecb.fsr201811.en.pdf (10.11.2021).

ECB (2020a). Financial stability review, November 2020. European Central Bank. Retrieved from https://www.ecb.europa.eu/pub/pdf/fsr/ecb.fsr202011~b 7be9ae1f1.en.pdf (11.11.2021).

ECB (2020b). The euro area bank lending survey. Fourth quarter of 2020. European Central Bank, Frankfurt a/M, Germany. Retrieved from https://www.ecb.europa.eu/stats/ecb_surveys/bank_lending_survey/html/ecb.blssurvey2020q4~e89c77d212.en.html (25.10.2021).

ECB (2021). Banks back to pre-pandemic profitability, but will it last? European Central Bank-Banking Supervision Newsletter, 16 November 2021. Retrieved from https://www.bankingsupervision.europa.eu/press/publications/newsletter /2021/html/ssm.nl211116_1.en.html (22.11.2021).

Eichengreen, B., & Gibson, H. D. (2001). Greek banking at the dawn of the new millennium. CEPR Discussion Paper, 2791.

Elsas, R., Hackethal, A., & Holzhäuser, M. (2010). The anatomy of bank diversification. Journal of Banking & Finance, 34(6), 1274?1287. doi: 10.1016/j.jbankf in.2009.11.024.

Fang, Y. Hasan, I., & Marton, K. (2011). Institutional development and its impact on the performance effect of bank diversification: evidence from transition economies. Emerging Markets Finance and Trade, 47(4), 5?22. doi: 10.2307/4 1343430.

Gallo, J., Apilado, V., & Kolari., J. (1996). Commercial bank mutual fund activities: implications for bank risk and profitability. Journal of Banking & Finance, 20(10), 1775?1791. doi: 10.1016/S0378-4266(96)00024-6.

Goddard, J., Molyneux, P., & Wilson, J. (2004). The profitability of European banks: a cross-sectional and dynamic panel analysis. Manchester School, 72, 363?381. doi: 10.1111/j.1467-9957.2004.00397.x.

Goetz, M., Laeven, L., & Levine, R. (2013). Identifying the valuation effects and agency costs of corporate diversification: evidence from the geographic diversification of U.S. Banks. Review of Financial Studies, 26(7), 1787?1823. doi: 10.1093/rfs/hht021.

Hale, T., Angrist, N., Goldszmidt, R., Kira, B., Petherick, A., Phillips, T., Webster, S., Cameron-Blake, E., Hallas, L., Majumdar, S., & Tatlow, H. (2021). A global panel database of pandemic policies (Oxford COVID-19 Government Response Tracker). Nature Human Behaviour, 5, 529?538. doi: 10.1038/s41562-021-01079-8.

Houston, J., James, C., & Ryngaet, M. (2001). Where do merger gains come from? Bank mergers from the perspective of insiders and outsiders. Journal of Financial Economics, 60(2-3), 285?331. doi: 10.1016/S0304-405X(01)00046-0.

Huang, G. (2018). Non-interest income, diversification and bank performance based on Chinese banking with GMM/DPD technique. Theory and Practice of Finance and Economics, 39(2), 9?15.

IMF (2021). World economic outlook 2021. International Monetary Fund: Washington DC, USA,

Kanga, D., Murinde, V., & Soumaréc, I. (2020). Capital, risk and profitability of WAEMU banks: does bank ownership matter? Journal of Banking and Finance, 114, 1?22. doi: 10.1016/j.jbankfin.2020.105814.

Kohler, M. (2014). Does non-interest income make banks more risky? Retail- versus investment-oriented banks. Review of Financial Economics, 23(4), 182?193. doi: 10.1016/j.rfe.2014.08.001.

Laeven, L., & Levine, R. (2007). Is there a diversification discount in financial conglomerates? Journal of Financial Economics, 85(2) 331?367. doi: 10.1016 /j.jfineco.2005.06.001.

Lamont, O. (1997). Cashflow and investment: evidence from internal capital markets. Journal of Finance, 52(1), 83?109. doi: 10.1111/j.1540-6261.1997.tb0 3809.x.

Landskroner, Y., Ruthenberg, D., & Zaken, D. (2005). Diversification and performance in banking: the Israeli case. Journal of Financial Services Research, 27(1), 27?49. doi: 10.2139/ssrn.675230.

Le, T., & Ngo, T. (2020). The determinants of bank profitability: a cross-country analysis. Central Bank Review, 20(2), 65?73. doi: 10.1016/j.cbrev.2020.04.001.

Li, X, Feng, H., Zhao, S., & Carter, D. (2021). The effect of revenue diversification on bank profitability and risk during the COVID-19 pandemic. Finance Research Letters, 43, 101957. doi: 10.1016/j.frl.2021.101957.

Mergaerts, F., & Vennet, R.V. (2016). Business models and bank performance: a long-term perspective. Journal of Financial Stability, 22(C), 57?75. doi: 10.1 16/j.jfs.2015.12.002.

NBP (2020). Senior loan officer opinion survey on bank lending practices and credit conditions. 3rd quarter 2020. Warsaw: Narodowy Bank Polski.

Pennathur, A., Subrahmanyam, V., & Vishwasrao, S. (2012). Income diversification and risk: does ownership matter? An empirical examination of Indian banks. Journal of Banking & Finance, 36(8), 2203?2215. doi: 10.1016/j.jbank fin.2012.03.021.

Rajan, R., Servaes, H., & Zingales, L. (2000). The cost of diversity: the diversification discount and inefficient investment. Journal of Finance, 55(1), 35?80. doi: 10.1111/0022-1082.00200.

Rogers, K., & Sinkey, J. (1999). An analysis of nontraditional activities at U.S. commercial banks. Review of Financial Economics, 8(1). doi: 10.1016/S1058-3300(99)00005-1.

S&Ps Global Ratings (2020). Banks in emerging markets. Countries, three COVID-19 shocks. Standard & Poor's Financial Services LLC. Retrieved from https://www.spglobal.com/ratings/en/research/pdf-articles/2020-05-26-banks-in -emerging-markets-15-countries-three-covid-19-shocks (21.1.2021).

Saunders, A., Schmid, M., & Walter, I. (2020). Strategic scope and bank performance. Journal of Financial Stability, 46, 100715. doi: 10.1016/j.jfs.2019.10 0715.

Scharfstein, D., & Stein, J. (2000). The dark side of internal capital markets: divisional rent-seeking and inefficient investment. Journal of Finance, 55(6), 2537?2564. doi: 10.1111/0022-1082.00299.

Simoens, M., & Vennet, R.V. (2021). Does diversification protect European banks? market valuations in a pandemic? Finance Research Letters, 44, 102093. doi: 10.1016/j.frl.2021.102093.

Stiroh, K., & Rumble, A. (2006). The dark side of diversification: the case of US financial holding companies. Journal of Banking & Finance, 30(8), 2131?2161. doi: 10.1016/j.jbankfin.2005.04.030.

Wang, C., & Lin, Y. (2021). Income diversification and bank risk in Asia Pacific North American Journal of Economics and Finance, 57, 101448. doi: 10.1016/j .najef.2021.101448.

White, H. (1980). A heteroskedasticity-consistent covariance matrix estimator and a direct test for heteroskedasticity. Econometrica, 48(4), 817?838. doi: 10.2307 /1912934.

Williams, B. (2016). The impact of non-interest income on bank risk in Australia. Journal of Banking & Finance, 73, 16?37. doi: 10.1016/j.jbankfin.2016.07.019.

Williams, B., & Prather, L. (2010). Bank risk and return: the impact of bank non-interest income, International Journal of Managerial Finance, 6(3), 220?244. doi: 10.1108/17439131011056233.

Wooldridge, J. M. (2012). Introductory econometrics: a modern approach. Boston: Cengage Learning.

Zhang, A., Wang, S., Liu, B., & Fu, J. (2020). The double-edged sword effect of diversified operation on pre- and post-loan risk in the government-led Chinese commercial banks. North American Journal of Economics and Finance, 54, 101246. doi: 10.1016/j.najef.2020.101246.

Zhou, K. (2014). The effect of income diversification on bank risk: evidence from China. Emerging Markets Finance Trade, 50(3), 201?213. doi: 10.2753/REE15 40-496X5003S312.




How to Cite

Kozak , S. ., & Wierzbowska, A. (2022). Did the COVID-19 pandemic amplify the positive impact of income diversification on the profitability of European banks?. Equilibrium. Quarterly Journal of Economics and Economic Policy, 17(1), 11–29. https://doi.org/10.24136/eq.2022.001