Bank Diversification and Lending Resiliency

In this paper, we show the benefits of bank asset diversification for the economy. A more diversified stream of earnings enables banks to better absorb negative shocks, leading to increased and more stable lending. This, in turn, provides positive spillovers to the economy. We demonstrate that this diversification-induced lending resiliency is beneficial during the financial crisis, when maintaining credit availability is of paramount importance. We use changes in bank regulation as exogenous shocks to identify the causal effect of asset diversification. Our results speak to the long-standing debate in the literature and among policy makers about whether the expansion of banks into new activities benefits or threatens the economy, and provide some counterbalance to concerns about systemic risk