Abstract:

The theory suggests that banking competition affects the degree 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 phenomenon aligned with the conventional wisdom (Smith, 1984), that non-interest income are more stable, and fee-based income will reduce bank’s risk. In the middle of the sweltering question of the benefits from banking sector integration, this study aims to investigate the impact of income diversification and foreign ownership on the financial stability of the banks. By employing panel regression technique with random effect and fixed effect models, of listed banks from 8 Asia Pacific countries for the period of 2005-2015, the results suggest that income diversification and foreign ownership influenced the financial stability of banks. This finding implies that foreign ownership increases financial stability in the Asia Pacific region by reducing risk, which indicates evidence of the global advantage hypothesis.