This paper examines banks’ diversification–performance nexus from the perspective of demand, the magnitude of households’ financial participation, with bank data from 22 European countries over the period from 2002 to 2009. We argue that the magnitude of households’ financial participation develops asymmetric diversification effects on banks’ performance. The empirical investigation herein provides evidence for the asymmetric influence of households’ financial participation on the effect of banks’ income diversification on their performance. Our findings suggest that banks should take into account the deposit interest rates and the variety of households’ investment habits when they operate toward diversification.

This paper explores the determinants for the leverage decision of financial institutions via the channels of bank-specific characteristics, peer bank behavior, and economic policy uncertainties, which are critical to appropriately control the risk of the financial system and explain the cross-sectional heterogeneity in risk-taking behavior among financial institutions. Our results indicate that bank-specific characteristics are the most influential one among the three channels for leverage decision of financial institutions, while the other two channels also exhibit significant effects on the leverage decision. We further note that economic policy uncertainty may affect their leverage decisions through the channels of their shifting lending behavior and risk-taking capacity.