IDEAS home Printed from https://ideas.repec.org/a/eee/jbfina/v73y2016icp16-37.html
   My bibliography  Save this article

The impact of non-interest income on bank risk in Australia

Author

Listed:
  • Williams, Barry

Abstract

The relationship between bank revenue composition and bank risk in Australia is modeled using data drawn from Australian bank confidential regulatory returns. It is found that those banks with lower levels of non-interest income and higher revenue concentration are less risky, consistent with previous international evidence. Evidence is also found supportive of increased risk due to too-big-to-fail effects, with this risk increase being offset by a decline in large bank risk after the crisis of 2007–2008. Non-interest income is generally found to be risk increasing, but some types of non-interest income are risk reducing when bank specialization effects are considered. It is also found that the 2008 financial crisis changed some aspects of the relationship between bank risk and revenue composition.

Suggested Citation

  • Williams, Barry, 2016. "The impact of non-interest income on bank risk in Australia," Journal of Banking & Finance, Elsevier, vol. 73(C), pages 16-37.
    • Handle: RePEc:eee:jbfina:v:73:y:2016:i:c:p:16-37
    DOI: 10.1016/j.jbankfin.2016.07.019
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S037842661630139X
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jbankfin.2016.07.019?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Barry Williams & Laurie Prather, 2010. "Bank risk and return: the impact of bank non‐interest income," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 6(3), pages 220-244, June.
    2. Berger, Philip G & Ofek, Eli, 1996. "Bustup Takeovers of Value-Destroying Diversified Firms," Journal of Finance, American Finance Association, vol. 51(4), pages 1175-1200, September.
    3. Timothy Clark & Astrid A. Dick & Beverly Hirtle & Kevin J. Stiroh & Robard Williams, 2007. "The role of retail banking in the U.S. banking industry: risk, return, and industry structure," Economic Policy Review, Federal Reserve Bank of New York, vol. 13(Dec), pages 39-56.
    4. Stiroh, Kevin J. & Rumble, Adrienne, 2006. "The dark side of diversification: The case of US financial holding companies," Journal of Banking & Finance, Elsevier, vol. 30(8), pages 2131-2161, August.
    5. Lepetit, Laetitia & Nys, Emmanuelle & Rous, Philippe & Tarazi, Amine, 2008. "The expansion of services in European banking: Implications for loan pricing and interest margins," Journal of Banking & Finance, Elsevier, vol. 32(11), pages 2325-2335, November.
    6. Berger, Allen N. & Hasan, Iftekhar & Zhou, Mingming, 2010. "The effects of focus versus diversification on bank performance: Evidence from Chinese banks," Journal of Banking & Finance, Elsevier, vol. 34(7), pages 1417-1435, July.
    7. Laeven, Luc & Levine, Ross, 2007. "Is there a diversification discount in financial conglomerates?," Journal of Financial Economics, Elsevier, vol. 85(2), pages 331-367, August.
    8. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    9. Viral V. Acharya & Iftekhar Hasan & Anthony Saunders, 2006. "Should Banks Be Diversified? Evidence from Individual Bank Loan Portfolios," The Journal of Business, University of Chicago Press, vol. 79(3), pages 1355-1412, May.
    10. DeYoung, Robert & Roland, Karin P., 2001. "Product Mix and Earnings Volatility at Commercial Banks: Evidence from a Degree of Total Leverage Model," Journal of Financial Intermediation, Elsevier, vol. 10(1), pages 54-84, January.
    11. Schmid, Markus M. & Walter, Ingo, 2009. "Do financial conglomerates create or destroy economic value?," Journal of Financial Intermediation, Elsevier, vol. 18(2), pages 193-216, April.
    12. David E Allen & Robert Powell, 2012. "The fluctuating default risk of Australian banks," Australian Journal of Management, Australian School of Business, vol. 37(2), pages 297-325, August.
    13. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 51(3), pages 393-414.
    14. Barry Williams & Gulasekaran Rajaguru, 2013. "The chicken or the egg? The trade-off between bank fee income and net interest margins," Australian Journal of Management, Australian School of Business, vol. 38(1), pages 99-123, April.
    15. Merton, Robert C., 1977. "An analytic derivation of the cost of deposit insurance and loan guarantees An application of modern option pricing theory," Journal of Banking & Finance, Elsevier, vol. 1(1), pages 3-11, June.
    16. David Roodman, 2009. "How to do xtabond2: An introduction to difference and system GMM in Stata," Stata Journal, StataCorp LP, vol. 9(1), pages 86-136, March.
    17. Parkinson, Michael, 1980. "The Extreme Value Method for Estimating the Variance of the Rate of Return," The Journal of Business, University of Chicago Press, vol. 53(1), pages 61-65, January.
    18. repec:zbw:bofitp:2010_004 is not listed on IDEAS
    19. Michael McAleer, 2009. "The Ten Commandments For Optimizing Value‐At‐Risk And Daily Capital Charges," Journal of Economic Surveys, Wiley Blackwell, vol. 23(5), pages 831-849, December.
    20. DeYoung, Robert & Torna, Gökhan, 2013. "Nontraditional banking activities and bank failures during the financial crisis," Journal of Financial Intermediation, Elsevier, vol. 22(3), pages 397-421.
    21. Ram T. S. Ramakrishnan & Anjan V. Thakor, 1984. "Information Reliability and a Theory of Financial Intermediation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 51(3), pages 415-432.
    22. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
    23. Jeffrey M Wooldridge, 2010. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232588, December.
    24. van Lelyveld, Iman & Knot, Klaas, 2009. "Do financial conglomerates create or destroy value? Evidence for the EU," Journal of Banking & Finance, Elsevier, vol. 33(12), pages 2312-2321, December.
    25. De Haan, Jakob & Poghosyan, Tigran, 2012. "Bank size, market concentration, and bank earnings volatility in the US," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(1), pages 35-54.
    26. Saunders, Anthony & Walter, Ingo, 1994. "Universal Banking in the United States: What Could We Gain? What Could We Lose?," OUP Catalogue, Oxford University Press, number 9780195080698, Decembrie.
    27. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    28. Simon Kwan & Robert Eisenbeis, 1997. "Bank Risk, Capitalization, and Operating Efficiency," Journal of Financial Services Research, Springer;Western Finance Association, vol. 12(2), pages 117-131, October.
    29. Robert DeYoung & Tara Rice, 2004. "Noninterest Income and Financial Performance at U.S. Commercial Banks," The Financial Review, Eastern Finance Association, vol. 39(1), pages 101-127, February.
    30. Allen, Franklin & Santomero, Anthony M., 2001. "What do financial intermediaries do?," Journal of Banking & Finance, Elsevier, vol. 25(2), pages 271-294, February.
    31. Kaufman, George G., 2014. "Too big to fail in banking: What does it mean?," Journal of Financial Stability, Elsevier, vol. 13(C), pages 214-223.
    32. Viral Acharya & Robert Engle & Matthew Richardson, 2012. "Capital Shortfall: A New Approach to Ranking and Regulating Systemic Risks," American Economic Review, American Economic Association, vol. 102(3), pages 59-64, May.
    33. Stiroh, Kevin J., 2006. "A Portfolio View of Banking with Interest and Noninterest Activities," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(5), pages 1351-1361, August.
    34. Sassan Alizadeh & Michael W. Brandt & Francis X. Diebold, 2002. "Range‐Based Estimation of Stochastic Volatility Models," Journal of Finance, American Finance Association, vol. 57(3), pages 1047-1091, June.
    35. Sturm, Jan-Egbert & Williams, Barry, 2004. "Foreign bank entry, deregulation and bank efficiency: Lessons from the Australian experience," Journal of Banking & Finance, Elsevier, vol. 28(7), pages 1775-1799, July.
    36. Nguyen, James, 2012. "The relationship between net interest margin and noninterest income using a system estimation approach," Journal of Banking & Finance, Elsevier, vol. 36(9), pages 2429-2437.
    37. Neil Esho & Paul Kofman & Ian Sharpe, 2005. "Diversification, Fee Income, and Credit Union Risk," Journal of Financial Services Research, Springer;Western Finance Association, vol. 27(3), pages 259-281, September.
    38. Williams, Barry, 1998. "Factors affecting the performance of foreign-owned banks in Australia: A cross-sectional study," Journal of Banking & Finance, Elsevier, vol. 22(2), pages 197-219, February.
    39. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 277-297.
    40. Sturm, Jan-Egbert & Williams, Barry, 2008. "Characteristics determining the efficiency of foreign banks in Australia," Journal of Banking & Finance, Elsevier, vol. 32(11), pages 2346-2360, November.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Williams, Barry & Rajaguru, Gulasekaran, 2022. "The evolution of bank revenue and risk in the Asia-Pacific Region," Pacific-Basin Finance Journal, Elsevier, vol. 71(C).
    2. Williams, Barry, 2014. "Bank risk and national governance in Asia," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 10-26.
    3. Jeon, Bang Nam & Wu, Ji & Chen, Limei & Chen, Minghua, 2020. "Diversification, efficiency and risk of banks: New consolidating evidence from emerging economies," School of Economics Working Paper Series 2020-10, LeBow College of Business, Drexel University.
    4. Wang, Chunyang & Lin, Yongjia, 2021. "Income diversification and bank risk in Asia Pacific," The North American Journal of Economics and Finance, Elsevier, vol. 57(C).
    5. Haykel Zouaoui & Faten Zoghlami, 2023. "What do we know about the impact of income diversification on bank performance? A systematic literature review," Journal of Banking Regulation, Palgrave Macmillan, vol. 24(3), pages 286-309, September.
    6. Abedifar, Pejman & Molyneux, Philip & Tarazi, Amine, 2018. "Non-interest income and bank lending," Journal of Banking & Finance, Elsevier, vol. 87(C), pages 411-426.
    7. Pejman Abedifar & Philip Molyneux & Amine Tarazi, 2014. "Non-Interest Income Activities and Bank Lending," Working Papers hal-00947074, HAL.
    8. Abuzayed, Bana & Al-Fayoumi, Nedal & Molyneux, Phil, 2018. "Diversification and bank stability in the GCC," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 57(C), pages 17-43.
    9. Dang, Van Dan, 2020. "Do non-traditional banking activities reduce bank liquidity creation? Evidence from Vietnam," Research in International Business and Finance, Elsevier, vol. 54(C).
    10. Šeho, Mirzet & Ibrahim, Mansor H. & Mirakhor, Abbas, 2021. "Does sectoral diversification of loans and financing improve bank returns and risk in dual-banking systems?," Pacific-Basin Finance Journal, Elsevier, vol. 68(C).
    11. Saoussen Ben Gamra & Dominique Plihon, 2011. "Revenue diversification in emerging market banks: implications for financial performance," CEPN Working Papers hal-00598136, HAL.
    12. Tran, Dung Viet, 2020. "Bank business models and liquidity creation," Research in International Business and Finance, Elsevier, vol. 53(C).
    13. Khan, Abu & Hassan, M. Kabir & Maroney, Neal & Boujlil, Rhada & Ozkan, Bora, 2020. "Efficiency, diversification, and performance of US banks," International Review of Economics & Finance, Elsevier, vol. 67(C), pages 101-117.
    14. Barry Williams & Gulasekaran Rajaguru, 2013. "The chicken or the egg? The trade-off between bank fee income and net interest margins," Australian Journal of Management, Australian School of Business, vol. 38(1), pages 99-123, April.
    15. Saoussen Ben Gamra & Dominique Plihon, 2011. "Revenue diversification in emerging market banks: implications for financial performance," Working Papers hal-00598136, HAL.
    16. Westman, Hanna, 2011. "The impact of management and board ownership on profitability in banks with different strategies," Journal of Banking & Finance, Elsevier, vol. 35(12), pages 3300-3318.
    17. Curi, Claudia & Murgia, Maurizio, 2018. "Divestitures and the financial conglomerate excess value," Journal of Financial Stability, Elsevier, vol. 36(C), pages 187-207.
    18. Dung V. Tran & M. Kabir Hassan & Isabelle Girerd‐Potin & Pascal Louvet, 2020. "Activity Strategies, Agency Problems, And Bank Risk," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 43(3), pages 575-613, August.
    19. Khanh Ngoc Nguyen, 2019. "Revenue Diversification, Risk and Bank Performance of Vietnamese Commercial Banks," JRFM, MDPI, vol. 12(3), pages 1-21, August.
    20. Marinelli, Giuseppe & Nobili, Andrea & Palazzo, Francesco, 2022. "The multiple dimensions of bank complexity: Effects on credit risk-taking," Journal of Banking & Finance, Elsevier, vol. 134(C).

    More about this item

    Keywords

    Bank risk; Non-interest risk; Interval value at risk;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jbfina:v:73:y:2016:i:c:p:16-37. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jbf .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.