Empirical Analysis: Impact On Banks Profitability And Operation Risk Of Diversification Of Commercial Banking Business

Since the Central Economic Work Conference held in the December 2010 clearly stated to be implemented "sound monetary policy", the extraordinary external drive of the commercial banks, which exists in the year of 2009 and 2010, brings a severe test to the business model of commercial banks. In order to improve the capital adequacy ratio, improve the level of banking services, profitability, commercial banks have to put the non-interest business expansion on the important strategic position of its business development services. Furthermore, commercial banks have also made great efforts to develop intermediary businesses and retail business to reduce the high dependence on the spread income, thus contributing to the transformation of business and profit model. Therefore, this paper will take the effects of the diversification in the commercial banking business as the focus of our study.Many scholars, both at home and abroad, have done much research on the impact of the diversification in the commercial banking business. However, the conclusions are different in the direction of impact. Based on previous research, this paper first analyzes the impact of diversification on the profitability and business risk of commercial banks from a theoretical point of view. Starting from the theoretical analysis, this paper uses the dynamic panel GMM method for the first time, and selects the unbalanced panel data from 2000 to 2009 of 19 banks of China to do the related empirical analysis of the impact of diversification. In the empirical analysis, this paper considerate the relationship of diversification, profitability and business risk from a multi-dimension. I introduce multiple variables and explanatory variables to the empirical analysis, thus give a more comprehensive study of the diversification effect.The empirical results show that over the past decade, business diversification had a positive impact on the profitability of commercial banks in China. Diversification not only improves the return on assets of commercial banks, but also improves its return on equity. But the impact on the rate of return on equity is much larger than the impact on the rate of return on assets; Diversification also helps reduce the risk of some of the operation-credit risk, liquidity risk; The financial data of commercial banks have significant inertia, that the current data are affected by the data lagged one period significantly. In some models, the diversification index and the macroeconomic indicators are of the same direction and highly complementary.Based on theoretical analysis, combined with empirical results, this paper recommends the following:promoting the diversification steadily, which in the meanwhile enhance the profitability and reduce the operating risk of commercial banks; In the process of diversification, focus on its size and historical data, to be realistic and not expand blindly; In the process of diversification, explore ways to self-produced product line, and enhance the overall competitiveness; In the regression process of the monetary policy, we can use the substitution effect of diversification to undertake diversification, expand revenue channels and consolidate the earning base.