Diversification, Ownership Structure, and Solidity of Banks in Era of Digitalisation

Abstract

Through the mechanics of contagion, bank failures not only cause economic agents to suffer financial losses but also cause the entire financial system to become unstable. As a result, the bank needs to safeguard itself against various threats. This study analyses the relationship between the diversification of banking activities and governance mechanisms while taking into account the concept of ownership structure in banking firms to explain the level of risk. The authors took the sample from 10 main Tunisian banks listed on the Tunis Stock Exchange for the period 2002 to 2020. The result of the FGLS regression showed that the separation between traditional and non-traditional activity has a favourable effect on banking stability because the diversification of activities allows banks to establish synergies between the different sectors, thus increasing the level of stability of banking firms by reducing the level of risk. The authors found that the financial strength of Tunisian banks is positively influenced by the degree of diversification of the banks' sources of income.