Cross border banking sector: Evidence of diversification and financial stability in Asia Pacific

A glorious trend of globalization in the last two decades provokes banks to intensify theirparticipation to get benefits from the opportunity in larger market, such as deregulation, moreadvanced communication and technology, as well as better economic condition (Claessens & Horen,2012). Despite the benefit, member country of the cooperation is also facing increasing competitionamong themselves and in the region (Remolona & Shim, 2015).Yet, this opportunity also rise the riskof financial instability (Remolona & Shim, 2015) due to borderless economy as a result of globalintegration (Ashraf, Ramady, & Albinali, 2016).Theory suggests that banking competition affects thedegree of bank’s financial innovation, such as increasing revenues from non-traditional activities(Claessens & Laeven, 2004), by diversifying their income (Pennathur, Subrahmanyam, & Vishwarao,2012). This is inline with the conventional wisdom (Smith, 1984), that non-interest income are morestable and fee-based income will reduce bank’s risk. In the middle of sweltering question of thebenefits from banking sector integration, this study aims to investigate the impact of incomediversification and foreign ownership on financial stability of the banks. By employing panelregression technique with random effect and fixed effect models, of 82 listed banks from 8 AsiaPacific countries for a period of 2005-2015, the findings suggest that income diversification andforeign ownership influenced financial stability of banks. This result implies that foreign ownershipincreases financial stability in the Asia Pacific region by reducing risk, which indicates an evidence ofthe global advantage hypothesis