For most banks however a higher share of non interest income 12 Many studies

For most banks however a higher share of non interest

This preview shows page 13 - 15 out of 21 pages.

For most banks, however, a higher share of non-interest income 12 Many studies focus on U.S. banks [see DeYoung and Roland (2001), DeYoung and Rice (2004), Goddard et al. (2008), Stiroh (2004a, b) and Stiroh and Rumble (2006)]. For Europe, the evidence is also mixed. Lepetit et al. (2008), for example, show that banks that have expanded their non-interest income activities are more risky than banks that mainly supply loans. Mercieca et al. (2007) obtain similar findings for a sample of small European banks. Chiorazzo et al. (2008), in contrast, find that Italian banks will have significantly higher risk- adjusted returns. For Germany, Busch and Kick (2009) show that savings and cooperative banks are significantly more profitable as well if they increase their share of non-interest income, while they find no impact of non-interest income on commercial banks’ profitability. There is also evidence to suggest that banks from developing countries benefit from increasing their non-interest income share [Sanya and Wolfe (2011)].
Image of page 13

Subscribe to view the full document.

10 The Journal of Financial Perspectives Business models in banking – how did they evolve and how do they need to be changed in the post-crisis period? and non-deposit funding is associated with greater instability. Common to both studies is their focus on listed banks, which are usually larger and have a more investment-oriented business model. This might have an important implication on how non- interest income affects bank risk. While investment-oriented banks might be better off increasing their share of interest income, unlisted banks such as savings and cooperative banks might benefit from expanding into non-interest income. Unlike investment-oriented banks, they generate most of their income from retail banking activities and mainly depend on interest income. For these banks, a higher share of non- interest income might be beneficial, since it would make them less dependent on interest income and on movements of interest rates and net interest margins. Expansion into non-interest income activities may also make these banks more resilient to overall economic conditions that affect their loan portfolios. This suggests that banks that focus on retail banking might be affected differently by an increase in non-interest income than investment-oriented banks, which already have a high share of non-interest income. Hence, to come to more general conclusions about the impact of non-interest income on risk, it is important to enlarge the sample of banks and to include listed and unlisted banks. Köhler (2012) takes this as a starting point to analyze the effect of non-interest income on risk and return in the E.U. banking sector. Using a large sample of listed and unlisted E.U. banks, he shows that smaller banks, in general, and savings and cooperative banks, in particular, become significantly more stable if they increase their share of non-interest income.
Image of page 14
Image of page 15
  • Winter '14

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Ask Expert Tutors You can ask You can ask ( soon) You can ask (will expire )
Answers in as fast as 15 minutes