On the income diversification and bank market power nexus in the MENA countries: Evidence from a GMM panel-VAR approach

Abstract This paper investigates the dynamic causal relationship between revenue diversification and bank market power using a broad sample of commercial banks from 17 Middle Eastern and North African (MENA) countries over the period 1993–2014. To do so, we employ the panel vector autoregression (PVAR) approach in a generalized method of moments (GMM) framework. Moreover, we use the impulse response functions (IRFs) tool to better understand the reaction of bank market power aftershocks on revenue diversification and vice-versa. Finally, we supplement our analysis by the forecast error variance decompositions (FEVds) of our variables. Overall, the results show that the level of bank market power declines in response to positive revenue diversification shocks. Conversely, banks with a higher level of market power get more involved in non-traditional activities.