IDEAS home Printed from https://ideas.repec.org/a/eee/empfin/v24y2013icp151-165.html
   My bibliography  Save this article

Are there diversification benefits of increasing noninterest income in the Chinese banking industry?

Author

Listed:
  • Li, Li
  • Zhang, Yu

Abstract

This paper assesses the potential diversification benefits of the increasing reliance on nontraditional business activities based on data from the Chinese banking industry in 1986–2008. At the aggregate level, there are diversification benefits of the increase in noninterest income. However, noninterest income has higher volatility and cyclicality than net interest income, and the marginal benefit of diversification decreases with the increase in noninterest income. At the bank level, the correlation coefficients of the growth rates of net interest income and noninterest income are mostly negative, which also suggests that there are diversification benefits of increasing the noninterest income. However, further model analysis indicates that the effect of the noninterest income share on the Chinese banking industry's revenue and risk is not significant. Overall, our findings suggest that noninterest income diversifies bank revenue, but increased reliance on noninterest income may worsen the risk/return trade-off for the Chinese banking industry.

Suggested Citation

  • Li, Li & Zhang, Yu, 2013. "Are there diversification benefits of increasing noninterest income in the Chinese banking industry?," Journal of Empirical Finance, Elsevier, vol. 24(C), pages 151-165.
  • Handle: RePEc:eee:empfin:v:24:y:2013:i:c:p:151-165
    DOI: 10.1016/j.jempfin.2013.10.004
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0927539813000716
    Download Restriction: Full text for ScienceDirect subscribers only

    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. Kwast, Myron L., 1989. "The impact of underwriting and dealing on bank returns and risks," Journal of Banking & Finance, Elsevier, vol. 13(1), pages 101-125, March.
    2. 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.
    3. Stiroh, Kevin J, 2004. "Diversification in Banking: Is Noninterest Income the Answer?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(5), pages 853-882, October.
    4. Baele, Lieven & De Jonghe, Olivier & Vander Vennet, Rudi, 2007. "Does the stock market value bank diversification?," Journal of Banking & Finance, Elsevier, vol. 31(7), pages 1999-2023, July.
    5. 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.
    6. Busch, Ramona & Kick, Thomas, 2009. "Income diversification in the German banking industry," Discussion Paper Series 2: Banking and Financial Studies 2009,09, Deutsche Bundesbank.
    7. Viral V. Acharya & Iftekhar Hasan & Anthony Saunders, 2002. "The effects of focus and diversification on bank risk and return: evidence from individual bank loan portfolios," Proceedings 905, Federal Reserve Bank of Chicago.
    8. 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.
    9. Kevin Stiroh, 2006. "New Evidence on the Determinants of Bank Risk," Journal of Financial Services Research, Springer;Western Finance Association, vol. 30(3), pages 237-263, December.
    10. 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.
    11. Vincenzo Chiorazzo & Carlo Milani & Francesca Salvini, 2008. "Income Diversification and Bank Performance: Evidence from Italian Banks," Journal of Financial Services Research, Springer;Western Finance Association, vol. 33(3), pages 181-203, June.
    12. Rosie Smith & Christos Staikouras & Geoffrey Wood, 2003. "Non-interest income and total income stability," Bank of England working papers 198, Bank of England.
    13. Rose, Peter S, 1989. "Diversification of the Banking Firm," The Financial Review, Eastern Finance Association, vol. 24(2), pages 251-280, May.
    14. 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.
    15. 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.
    16. Mercieca, Steve & Schaeck, Klaus & Wolfe, Simon, 2007. "Small European banks: Benefits from diversification?," Journal of Banking & Finance, Elsevier, vol. 31(7), pages 1975-1998, July.
    17. 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," Proceedings 213, Federal Reserve Bank of Chicago.
    18. 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.
    19. Cara S. Lown & Carol L. Osler & Philip E. Strahan & Amir Sufi, 2000. "The changing landscape of the financial services industry: what lies ahead?," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 39-54.
    20. Gallo, John G. & Apilado, Vincent P. & Kolari, James W., 1996. "Commercial bank mutual fund activities: Implications for bank risk and profitability," Journal of Banking & Finance, Elsevier, vol. 20(10), pages 1775-1791, December.
    21. Lawrence J. Radecki, 1999. "Banks' payments-driven revenues," Staff Reports 62, Federal Reserve Bank of New York.
    22. Lawrence J. Radecki, 1999. "Banks' payments-driven revenues," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 53-70.
    23. Boyd, John H. & Graham, Stanley L. & Hewitt, R. Shawn, 1993. "Bank holding company mergers with nonbank financial firms: Effects on the risk of failure," Journal of Banking & Finance, Elsevier, vol. 17(1), pages 43-63, February.
    24. Brewer, Elijah III, 1989. "Relationship between bank holding company risk and nonbank activity," Journal of Economics and Business, Elsevier, vol. 41(4), pages 337-353, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. repec:taf:applec:v:48:y:2016:i:58:p:5676-5698 is not listed on IDEAS
    2. repec:eee:ecmode:v:71:y:2018:i:c:p:87-98 is not listed on IDEAS
    3. repec:kap:regeco:v:53:y:2018:i:1:d:10.1007_s11149-017-9340-z is not listed on IDEAS
    4. repec:gam:jijfss:v:6:y:2018:i:2:p:40-:d:139429 is not listed on IDEAS
    5. repec:eee:jbfina:v:80:y:2017:i:c:p:203-214 is not listed on IDEAS

    More about this item

    Keywords

    Net interest income; Noninterest income; Income diversification; Bank risk;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

    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:empfin:v:24:y:2013:i:c:p:151-165. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: http://www.elsevier.com/locate/jempfin .

    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 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.