Impact of Income Diversification on the Sustainability of Commercial Banks

The work is devoted to the study of the impact of income diversification on the stability of commercial banks. The study is based on quarterly data on 200 Russian banks for the period from 2011 to 2019. In order to study the impact of diversification on the stability of banks, the methodology for assessing financial stability was developed based on the CAMELS methodology and specifics of Russian legislation. As a characteristic of the Bank's income diversification, the model included an indicator of diversification based on the Herfindal-Hirschman index. In addition, the impact of the shares of certain types of income on the financial stability of banks was separately studied. In the course of the study, it was found that there is a positive effect of increasing diversification on improving the assessment of financial stability using the CAMELS method. These results were also confirmed by studying the influence of the diversification index on the Z-score indicator. However, it was found that changes in diversification do not have the same positive impact on all aspects of Russian banks ' activities. In particular, there is a negative impact on the management quality indicators, that could mean that with the change in the actual structure of the Bank's activities, the management system is subject to additional pressure, which can be expressed in increased costs. In addition, the study showed that not all activities have a positive impact on the stability of banks. At this point in time, the basis for income diversification is interest and commission income, which is becoming the main way for banks to increase profitability under pressure on interest rates. Finally, the study analyzed the impact of diversification on groups of banks by various classification criteria: for small and large banks, divided by net assets, there were no significant differences in the impact of diversification. For the separation of banks ' business models differences in the impact was more significant: so for banks who hold retail model, that is, specialization in working with individuals, strategy of diversification is insignificant impact on the financial stability of these banks, and given the prevailing loss of other non-interest income, it becomes negative. On the contrary, for corporate and universal banks, to a greater extent, diversification has a significant positive impact.