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Bank activity and funding strategies : the impact on risk and returns

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  • Demirguc-Kunt, Asli
  • Huizinga, Harry

Abstract

This paper examines the implications of bank activity and short-term funding strategies for bank risk and returns using an international sample of 1,334 banks in 101 countries leading up to the 2007 financial crisis. Expansion into non-interest income generating activities such as trading increases the rate of return on assets, and it may offer some risk diversification benefits at very low levels. Non-deposit, wholesale funding, by contrast, lowers the rate of return on assets, although it can offer some risk reduction at commonly observed low levels of non-deposit funding. A sizeable proportion of banks, however, attract most of their short-term funding in the form of non-deposits at a cost of enhanced bank fragility. Overall, banking strategies that rely prominently on generating non-interest income or attracting non-deposit funding are very risky, which is consistent with the demise of the U.S. investment banking sector.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 4837.

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Date of creation: 01 Feb 2009
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Handle: RePEc:wbk:wbrwps:4837

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Keywords: Banks&Banking Reform; Debt Markets; Emerging Markets; Access to Finance;

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