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Diversification in banking: is noninterest income the answer?

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Kevin J. Stiroh

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Abstract

The U.S. banking industry is steadily increasing its reliance on nontraditional business activities that generate fee income, trading revenue, and other types of noninterest income. This paper assesses potential diversification benefits from this shift. At the aggregate level, declining volatility of net operating revenue reflects reduced volatility of net interest income, rather than diversification benefits from noninterest income, which is quite volatile and has become more correlated with net interest income. At the bank level, growth rates of net interest income and noninterest income have also become more correlated in recent years. Finally, greater reliance on noninterest income, particularly trading revenue, is associated with higher risk and lower risk-adjusted profits. These results suggest little obvious diversification benefit from the ongoing shift toward noninterest income.

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Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 154.

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Date of creation: 2002
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Handle: RePEc:fip:fednsr:154

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Keywords: Banks and banking Bank profits Interest Risk Banks and banking - Service charges

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  3. Simon Kwan, 1998. "Risk and return of banks' Section 20 securities affiliates," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue Oct 23. [Downloadable!]
  4. Donald Morgan & Kevin Stiroh, 2001. "Market Discipline of Banks: The Asset Test," Journal of Financial Services Research, Springer, vol. 20(2), pages 195-208, October. [Downloadable!] (restricted)
  5. Acharya, Viral V & Hasan, Iftekhar & Saunders, Anthony, 2002. "The Effects of Focus and Diversification on Bank Risk and Return: Evidence from Individual Bank Loan Portfolios," CEPR Discussion Papers 3252, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  6. Lawrence J. Radecki, 1999. "Banks' payments-driven revenues," Staff Reports 62, Federal Reserve Bank of New York. [Downloadable!]
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  8. Houston, Joel F. & Ryngaert, Michael D., 1994. "The overall gains from large bank mergers," Journal of Banking & Finance, Elsevier, vol. 18(6), pages 1155-1176, December. [Downloadable!] (restricted)
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  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. [Downloadable!] (restricted)
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  12. John H. Boyd & Stanley L. Graham, 1988. "The profitability and risk effects of allowing bank holding companies to merge with other financial firms: a simulation study," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 3-20. [Downloadable!]
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  1. Paola Dongili & Angelo Zago, 2005. "Bad loans and efficiency in Italian Banks," Working Papers 28, Università di Verona, Dipartimento di Scienze economiche. [Downloadable!]
  2. Gianni De Nicoló & Alexander F. Tieman, 2007. "Economic Integration and Financial Stability: A European Perspective," IMF Working Papers 06/296, International Monetary Fund. [Downloadable!]
  3. James Crotty, 2007. "If Financial Market Competition is so Intense, Why are Financial Firm Profits so High? Reflections on the Current ‘Golden Age’ of Finance," Working Papers wp134, Political Economy Research Institute, University of Massachusetts at Amherst. [Downloadable!]
  4. Gianni De Nicoló & Philip F. Bartholomew & Jahanara Zaman & M. G. Zephirin, 2003. "Bank Consolidation, Internationalization and Conglomeration: Trends and Implications for Financial Risk," IMF Working Papers 03/158, International Monetary Fund. [Downloadable!]
  5. Christian Calmès, 2004. "Regulatory Changes and Financial Structure: The Case of Canada," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 127(I), pages 1-35, March. [Downloadable!]
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  6. Beverly J. Hirtle & Kevin J. Stiroh, 2005. "The return to retail and the performance of U.S. banks," Staff Reports 233, Federal Reserve Bank of New York. [Downloadable!]
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  7. Til Schuermann, 2004. "Why were banks better off in the 2001 recession?," Current Issues in Economics and Finance, Federal Reserve Bank of New York, issue Jan. [Downloadable!]
  8. L. Baele & R. Vander Vennet & A. Van Landschoot, 2004. "Bank Risk Strategies and Cyclical Variation in Bank Stock Returns," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 04/217, Ghent University, Faculty of Economics and Business Administration. [Downloadable!]
  9. Andrew Kuritzkes & Til Schuermann & Scott M. Weiner, 2002. "Risk Measurement, Risk Management and Capital Adequacy in Financial Conglomerates," Center for Financial Institutions Working Papers 03-02, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
  10. Mark J. Flannery, 2006. "Supervising bank safety and soundness: some open issues," Proceedings, Federal Reserve Bank of San Francisco. [Downloadable!]
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  11. Mälkönen , Ville, 2004. "Capital adequacy regulation and financial conglomerates," Research Discussion Papers 10/2004, Bank of Finland. [Downloadable!]
  12. Charles W. Calomiris & Doron Nissim, 2007. "Activity-Based Valuation of Bank Holding Companies," NBER Working Papers 12918, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  13. Yongil Jeon & Stephen M. Miller, 2002. "Has Deregulation Affected Births, Deaths, and Marriages in the U.S. Commercial Banking Industry?," Working papers 2002-26, University of Connecticut, Department of Economics. [Downloadable!]
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  14. R. Vander Vennet & O. De Jonghe & L. Baele, 2004. "Bank risks and the business cycle," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 04/264, Ghent University, Faculty of Economics and Business Administration. [Downloadable!]
  15. Christian Calmès & Ying Liu, 2005. "Financial Structure Change and Banking Income: a Canada-U.S. Comparison," RePAd Working Paper Series UQO-DSA-wp0302005, Département des sciences administratives, UQO. [Downloadable!]
  16. Evelyn Hayden & Daniel Porath & Natalja von Westernhagen, 2006. "Does Diversification Improve the Performance of German Banks? Evidence from Individual Bank Loan Portfolios," Working Papers 110, Oesterreichische Nationalbank (Austrian Central Bank). [Downloadable!]
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