Dynamics of diversification and banks' risk‐taking and stability: Empirical analysis of commercial banks

This study examines the impact of asset, income, and funding diversification on the risk and stability of US commercial banks ranges from 2002 to 2019 by using two‐stage instrumental variables and GMM technique. The findings reveal that funding and asset (income) diversification decreases (increases) the banks' risks. The results indicated that income diversification has a significantly detrimental impact on the banks' stability, whereas funding and assets diversification positively contributes to banks' stability. The impact of diversification on risk‐taking and stability is heterogeneous for various categories and crisis period. Our study provides useful insights to policymakers and bank regulators.