Ownership structure, revenue diversification and insolvency risk in European banks

We investigate whether a relationship exists between ownership structure, revenue diversification and insolvency risk. Using a panel dataset of 158 listed banks across 15 European countries over the period 1995-2006, we provide the first empirical evidence of the impact of (i) ownership concentration (ii) foreign, government and employee/managerial majority shareholding on revenue diversification and insolvency risk. After controlling for bank characteristics, unobserved country effects, endogeneity bias, and an array of regulatory incentives, our core finding is that banks with concentrated ownership structures are more diversified and also more risky than their dispersed counterparts. In addition regarding the type of block shareholders, we find that foreign owned banks are less diversified but more stable than private or government owned banks. Finally, we find employee/managerial stockholding reduces insolvency risk, which is indicative of the agency cost problem being mitigated by this type of stockholding. By extension, our results have significant strategic implications for bank managers and supervisors in Europe.