Impact of diversification on systemic risk of conventional banks listed on the Indonesia Stock Exchange

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It is believed that bank diversification increases financial stability. However, several theories argue that diversification can trigger the spread of failure because of the increased interconnectivity between institutions. The aim of this study is to determine the impact of diversification on the systemic risk of banks. The sample of the study consists of 21 conventional banks listed on the Indonesia Stock Exchange from 2009 to 2018. The study uses firm-year fixed effect panel regression and an instrumental variable approach to examine how firm-specific variables determine the level of systemic risk. Diversification is measured by bank assets, funding, and revenue diversification. To measure the systemic risk, the Conditional Value-at-Risk (ΔCoVaR) methodology is applied. The results show that an increase in funding diversification leads to a decrease in ΔCoVaR, indicating that funding diversification exacerbates the level of systemic risk, whereas asset diversification and revenue diversification do not have significant effects on the level of systemic risk. The empirical findings suggest that the interconnectivity between banks should be reduced by limiting the diversification of funding in the banks to minimize their systemic risks.

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    • Table 1. Hausman test
    • Table 2. First stage regression results
    • Table 3. Diversification and systemic risk
    • Conceptualization
      Musa Fresno, Dewi Hanggraeni
    • Data curation
      Musa Fresno, Dewi Hanggraeni
    • Formal Analysis
      Musa Fresno, Dewi Hanggraeni
    • Funding acquisition
      Musa Fresno, Dewi Hanggraeni
    • Investigation
      Musa Fresno, Dewi Hanggraeni
    • Methodology
      Musa Fresno, Dewi Hanggraeni
    • Project administration
      Musa Fresno, Dewi Hanggraeni
    • Resources
      Musa Fresno, Dewi Hanggraeni
    • Visualization
      Musa Fresno, Dewi Hanggraeni
    • Writing – original draft
      Musa Fresno, Dewi Hanggraeni
    • Writing – review & editing
      Musa Fresno, Dewi Hanggraeni
    • Supervision
      Dewi Hanggraeni