Asymmetric effects of households’ financial participation on banking diversification

•Study financial participation effects on the performance–diversification relation.•The FP effect on the performance–diversification relation is asymmetric.•Investment patterns and monetary shifts are important to banks’ diversification.

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.