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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 analyze the impact of banks' non-interest income share on risk in the German banking sector for the period between 2002 and 2010. Using linear and quantile regression estimators, we find that the impact of non-interest income on risk significantly differs depending on banks' overall business model. More specifically, we show banks with retail-oriented business model such as savings banks, cooperative banks and other retail-oriented banks become significantly more stable if they increase their share of non-interest income. Investment-oriented banks, in contrast, become significantly more risky. They do not only report a significantly higher share of non-interest income, but also differ in terms of their activities from retail-oriented banks. Overall, this indicates that retail-oriented banks should increase their share of non-interest income to become more stable. Investment-oriented banks, in contrast, should decrease it. Our results imply that banks are significantly less risky if they have a more balanced income structure and neither depend heavily on interest nor on non-interest income. Furthermore, they indicate that the impact of non-interest income on risk significantly depends on the activities used to generate non-interest income with retail-oriented activities being significantly less risky than investment-oriented activities such as those pertaining to capital markets activities.

Suggested Citation

  • Köhler, Matthias, 2013. "Does non-interest income make banks more risky? Retail- versus investment-oriented banks," Discussion Papers 17/2013, Deutsche Bundesbank.
    • Handle: RePEc:zbw:bubdps:172013
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    References listed on IDEAS

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    2. Ferry Syarifuddin, 2022. "Is Islamic Banks Better Than Conventional Banks In The Time Of Uncertainty?," Working Papers WP/06/2022, Bank Indonesia.

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    More about this item

    Keywords

    banks; risk-taking; business model; non-interest income; diversification;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • 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

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