  Shaped by structural forces of change, banking in emerging markets has
recently experienced a decline in its traditional activities, leading banks to
diversify into new business strategies. This paper examines whether the
observed shift into non-interest based activities improves financial
performance. Using a sample of 714 banks across 14 East-Asian and
Latin-American countries over the post 1997-crisis changing structure, we find
that diversification gains are more than offset by the cost of increased
exposure to the non-interest income, specifically by the trading income
volatility. But this diversification performance's effect is found to be no
linear with risk, and significantly not uniform among banks and across business
lines. An implication of these findings is that banking institutions can reap
diversification benefits as long as they well-studied it depending on their
specific characteristics, competences and risk levels, and as they choose the
right niche.
