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Banks that diversify across customer segments, lending categories, income streams, geographies, and digital platforms are not courting fragility, but insulating themselves against it.

<p>Since the 2008 global financial crisis, the concept of banks diversifying their operations has sometimes been met with skepticism. Critics warned that expanding into new products, sectors, or geographies could make institutions too complex to manage and too interconnected to fail—ultimately increasing systemic risk. As a result, many banks chose to streamline operations and double down on their core competencies.</p><p>But today’s economic landscape, marked by inflation, geopolitical instability, and technological change, demands a different approach. In this environment, diversification isn’t a liability; it’s a safeguard. Banks that diversify across customer segments, lending categories, income streams, geographies, and digital platforms are not courting fragility, but insulating themselves against it.</p><h2>What happens when banks lean into diversification</h2><p>A <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4147790">report from the Wharton School at the University of Pennsylvania</a> highlights how diversification, in its many forms, may enhance a bank’s stability and ability to weather economic shocks.</p><p>Wharton finance professor Itay Goldstein, along with Michael Gelman (University of Delaware) and Andrew MacKinlay (Virginia Tech), analyzed U.S. bank diversification around the 2008 crisis. Their research found that banks that had already expanded beyond their original geographic and typical lending business boundaries were better positioned to sustain higher levels of lending, reduce risk, and stabilize revenue streams during the downturn.</p><p>The study, which examined lending trends from 1997 to 2017, <a href="https://www.thebanker.com/content/2030a19f-0c17-5e91-a971-6a033aeccad0">revealed</a> that diversified banks were more resilient and continued lending throughout the crisis. In fact, they were able to sustain higher levels of lending activity during the downturn, especially to small businesses.</p><p>Small businesses received more than twice as many loans from the most diversified banks compared to the least diversified. These loans played a critical role in helping businesses retain employees and create new jobs in local communities.</p><p>Interestingly, when diversified banks expanded into new markets or product areas, the broader banking sector didn’t suffer. On the contrary, the overall economic impact was largely positive.</p><h2>3 strategies to leverage bank diversification</h2><p>The 2008 crisis proved that diversification can be a powerful tool for stability. As banks navigate today’s uncertainties, these three strategies can help boost lending, minimize risk, and stabilize revenue:</p><ol><li><p><b>Expand into New Business Segments</br></b>Diversifying into non-lending activities—such as insurance, securities, investment banking, and trust services—can strengthen a bank’s ability to lend during economic stress. <a href="https://knowledge.wharton.upenn.edu/article/how-diversification-helps-banks-lend-more-cut-risk-and-boost-the-economy/#:~:text=%E2%80%9CDiversification%20gives%20banks%20more%20stability,not%20always%20been%20viewed%20favorably.">Insurance lines, in particular,</a> have shown strong performance during financial crises.</p></li><li><p><b>Broaden Geographic Reach</br></b>Lending across more counties or states enables banks to maintain higher lending levels during downturns. The most geographically diversified banks <a href="https://knowledge.wharton.upenn.edu/article/how-diversification-helps-banks-lend-more-cut-risk-and-boost-the-economy/#:~:text=%E2%80%9CDiversification%20gives%20banks%20more%20stability,not%20always%20been%20viewed%20favorably.">lent twice as much</a> to small businesses during the 2008 crisis compared to their less diversified peers.</p></li><li><p><b>Invest in Consumer Credit as an Asset Class</br></b><a href="https://blogs.cfainstitute.org/investor/2025/01/29/consumer-lending-unlocked-opportunities-and-risks-in-a-27-trillion-market/">Short-duration investments like personal loans</a> offer attractive returns with lower risk than long-dated assets. Allocating capital to non-mortgage consumer credit can help banks diversify their balance sheets and improve resilience.</p></li></ol><h2>Spotlight: personal loans are a growing asset class</h2><p>Personal loans are emerging as a compelling sub-asset class within consumer credit, offering access to a <a href="https://newsroom.transunion.com/q4-2024-ciir/">$251 billion market</a>. With shorter durations and higher yields than traditional fixed-income assets, personal loans can deliver strong earnings—even in a high-interest rate environment.</p><p>While long-duration, lower-yielding assets will remain part of most portfolios, personal loans offer a unique opportunity for banks to diversify and strengthen their investment strategies <a href="https://www.americanbanker.com/news/banks-face-promise-and-peril-with-weakened-bank-regulators">amid regulatory and economic uncertainty</a>.</p><h2>The takeaway</h2><p>There’s no crystal ball to predict the future of the economy or the banking sector. But one thing is clear: banks must prepare for turbulence. Once viewed with caution, diversification has proven to be a powerful force for stability.</p><p>As the Wharton study shows, diversified banks not only weathered the 2008 crisis—they helped fuel recovery. By embracing diversification across lending, geography, and investments, banks can reduce risk, support multiple local economies, and build the resilience needed to thrive in any economic climate.</p>

The typical investment mix of long-term loans and securities may turn out to yield lackluster results. Banks may have another investment option: consumer credit. 

<p>Bank leaders today are navigating a complex list of ever-changing challenges. With a premium on liquidity, commercial real estate under duress, and credit risks shifting across sectors, traditional asset strategies are being re-evaluated — forcing banks to rethink where, and how, they deploy capital. </p><p>The typical investment mix of long-term loans and securities may turn out to yield lackluster results. Banks may have another investment option: consumer credit. </p><p>In recent years, <a href="https://blogs.cfainstitute.org/investor/2025/01/29/consumer-lending-unlocked-opportunities-and-risks-in-a-27-trillion-market/">consumer credit</a> has emerged as a viable, but often overlooked investment alternative for banks that want to balance out their long-duration, lower-yielding fixed income portfolios. In particular, personal loans — a growing sub-class within consumer credit — have proven to be a solid investment option for banks, thanks to their short durations, high yields, and solid returns. Some banks choose to build a portfolio of personal loans by offering the product directly; others choose to invest in loan portfolios originated by fintech or other banks. Many banks like working with fintechs to benefit from access to the asset without the added infrastructure.</p><h2>Understanding personal loans as an asset class</h2><p><a href="https://blogs.cfainstitute.org/investor/2025/01/29/consumer-lending-unlocked-opportunities-and-risks-in-a-27-trillion-market/">Consumer lending</a> has a market size of $27 trillion (and growing) and is generally categorized into two core groups: property-backed residential mortgages and non-property-backed consumer loans. As an asset class, it offers investors access to a wide range of opportunities that provide exposure to the creditworthiness of consumers – from traditional residential mortgages and personal loans to emerging products, like buy now, pay later (BNPL) loans.</p><p>This massive growth in consumer lending has largely been fueled by changing consumer behaviors and technology advances.</p><h2>Four key benefits of personal loans as an asset class</h2><p>When banks choose to invest in consumer lending, and more specifically the sub-asset class of unsecured personal loans, they can benefit from the following:</p><h3>1. Quality borrowers</h3><p>Consumers that take out personal loans are often individuals that are actively looking to improve their financial future. Borrowers are usually in their mid-30s to mid-50s with established credit histories, higher incomes, and relatively solid credit scores. They want to find a way to manage their debt responsibly and generally use personal loans to consolidate high-interest credit card debt. </p><p>After consolidating debt with a personal loan, borrowers can benefit from one simple payment, fixed terms, and fixed interest rates. Plus, it’s common for their credit scores to increase. LendingClub Bank members, for instance, see a credit score increase of 48 points, on average, after consolidating debt with a personal loan.</p><h3>2. Solid returns banks can count on </h3><p>Personal loans often have shorter durations (with terms typically ranging from 24- to 72-months) compared to longer-dated asset classes, like mortgages. They also typically offer higher yields (typically approximately 6-8%) with a steady stream of income coming from borrowers who repay their loans. </p><p>Delinquency rates for personal loans are low and trending downward across all risk tiers. In the last quarter of 2024, TransUnion reported the 60+ days past due delinquency rate dropped to <a href="https://newsroom.transunion.com/q4-2024-ciir/">3.57%</a>, down from 3.90% the previous year.</p><h3>3. Opportunity for diversification</h3><p>With their relatively high yields and short durations, personal loans offer banks the chance to diversify their investment portfolios. Long-duration, lower-yielding and traditional fixed income assets will likely continue to be a part of a bank’s investing strategy; adding shorter-duration assets can help balance out a portfolio. </p><h3>4. A growing asset class</h3><p>Personal loans as a market segment continue to grow. The latest <a href="https://newsroom.transunion.com/q4-2024-ciir/">quarterly data</a> on the US personal loans segment from TransUnion shows a 15% uptick in originations over the previous year — marking the third consecutive quarter of year-over-year growth. </p><p>Currently, 23.5 million US consumers have an unsecured personal loan, with total loan balances reaching $251 billion, according to the latest TransUnion figures.</p><h2>A strong choice in uncertain economic times</h2><p>In this political and economic climate, <a href="https://www.americanbanker.com/news/banks-face-promise-and-peril-with-weakened-bank-regulators">the banking and lending regulatory landscape faces many unknowns</a>. A changing regulatory and macroeconomic landscape could <a href="https://www.reuters.com/world/us/financial-firms-hated-us-consumer-watchdog-rapid-unraveling-creates-limbo-2025-02-13/">keep the industry in limbo</a> for months to come. </p><p>During times of unpredictability, it can be hard for investors to evaluate and make longer-dated investments. Short duration investments can provide compelling returns with a shorter time horizon. </p><h2>What to consider when investing in personal loans</h2><p>When <a href="https://blogs.cfainstitute.org/investor/2025/01/29/consumer-lending-unlocked-opportunities-and-risks-in-a-27-trillion-market/">investing in personal</a> loans, investors can choose from a range of structures with different risk and return profiles. For instance, LendingClub Bank offers investors the flexibility to purchase loans on a passive or active basis, in bulk or as individual loans. Loans can also be purchased as whole loans or in security format.</p><p>Before investing in personal loans, banks should determine their objectives and where they want to play on the risk-return spectrum. They should also determine the best provider to work with—ideally one with deep experience in the space and a track record of delivering compelling returns. </p><h2>The bottom line</h2><p>With heightened uncertainty as multiple economic forces put pressure on banks’ balance sheets, U.S. banks would do well to look to new options. Despite the macro headwinds facing U.S. banks — tighter monetary policy, commercial real estate stress, and deposit volatility — personal loans stand out as a resilient asset class.</p><p>Amid falling valuations in fixed-income securities and rising credit risk in commercial real estate and corporate lending, personal loans offer a diversified, high-yielding, and risk-adjusted opportunity that aligns with the ever-evolving needs of banks.</p>

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