The Diversification Strategy of European Banks: Determinants and Effects on Efficency and profitability

The paper addresses the question of diversification in the banking sector. The need to look closely at the determining factors and economic effects of diversification in the financial sector stems from two main types of reasons. Firstly the banking diversification is taking on an increasingly important role the magnitude of which is difficult to assess without first defining and classifying the main business areas of financial intermediation. Secondly the expansion of banks’ activity towards the insurance services and the securities industry has important implications in terms of concentration and stability of financial systems.The paper has two main aims. The first one is to define more precisely the phenomenon of European banks’ diversification while at the same time mapping the considerable range of financial products and services with relation to the main business areas. The second aim is to analyse the economic factors which explain the European banks’ diversification and at the same time to evaluate the main implications of this process in terms of concentration, profitability and efficiency. In line with this objective the attention will be turned to the distinction between external and internal factors, which guide the activity choices of the large European banks. Consideration will be given to the effects of the changes in the demand for financial services on banks’ diversification.In examining the internal factors we will consider scale and scope economies as well as the effects of diversification on banks’ overall efficiency.The comparative analysis between the European banking systems will be developed through the use of some data base such as “Bank Profitability" and " Ibca-Bankscope ", while the analysis of the strategic behaviours of the Global Player will be developed using the documentary material and the annual reports.