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Does non-interest income make banks more risky? Retail- versus investment-oriented banks

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  • Köhler, Matthias

Abstract

In this paper, we show that the impact of non-interest income on bank risk differs between retail- and investment-oriented banks. More specifically, while retail-oriented banks such as savings, cooperative and other banks that focus on lending and deposit-taking services become significantly more stable (in the sense of having a higher Z-score) if they increase their share of non-interest income, investment-oriented banks become significantly more risky. They do not only generate a higher share of their income from non-traditional activities, but also engage in significantly different activities from retail-oriented banks. This might limit the potential benefits to investment-oriented banks of diversifying into non-interest income. Overall, therefore, our paper implies that it is important to distinguish between retail- and investment-oriented banks when drawing general conclusions regarding the impact of non-interest income on bank risk.

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  • Köhler, Matthias, 2014. "Does non-interest income make banks more risky? Retail- versus investment-oriented banks," Review of Financial Economics, Elsevier, vol. 23(4), pages 182-193.
    • Handle: RePEc:eee:revfin:v:23:y:2014:i:4:p:182-193
    DOI: 10.1016/j.rfe.2014.08.001
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    Cited by:

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    2. Sherika Antao & Ajit Karnik, 2022. "Bank Performance and Noninterest Income: Evidence from Countries in the Asian Region," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 29(3), pages 477-505, September.
    3. Ms. TengTeng Xu & Kun Hu & Mr. Udaibir S Das, 2019. "Bank Profitability and Financial Stability," IMF Working Papers 2019/005, International Monetary Fund.
    4. Sylwester Kozak & Agata Wierzbowska, 2022. "Did the COVID-19 pandemic amplify the positive impact of income diversification on the profitability of European banks?," Equilibrium. Quarterly Journal of Economics and Economic Policy, Institute of Economic Research, vol. 17(1), pages 11-29, March.
    5. Nderitu Kingori, 2016. "Market Structure, Macroeconomic Shocks, and Banking Risk in Kenya," Econometric Research in Finance, SGH Warsaw School of Economics, Collegium of Economic Analysis, vol. 1(2), pages 81-113, December.
    6. Addai, Bismark & Tang, Wenjin & Gyimah, Adjei Gyamfi & Twumasi, Martinson Ankrah, 2022. "Income diversification and bank performance nexus: Does corruption matter?," Journal of Multinational Financial Management, Elsevier, vol. 65(C).

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    More about this item

    Keywords

    Banks; Risk-taking; Business model; Non-interest income; Income diversification;
    All these keywords.

    JEL classification:

    • G - Financial Economics
    • G - Financial Economics
    • G - Financial Economics

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