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How do banks make money? the fallacies of fee income

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  • Robert DeYoung
  • Tara N. Rice

Abstract

In the first of two articles in this issue, the authors document the increasing importance of noninterest income at U.S. commercial banking companies and address two fundamental misunderstandings regarding this trend: the belief that fee-based activities provide more stable earnings than interest-based income and the belief that fee income flows chiefly from nontraditional, nonbanking activities.

Suggested Citation

  • Robert DeYoung & Tara N. Rice, 2004. "How do banks make money? the fallacies of fee income," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 28(Q IV), pages 34-51.
    • Handle: RePEc:fip:fedhep:y:2004:i:qiv:p:34-51:n:v.28no.4
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    File URL: http://www.chicagofed.org/digital_assets/publications/economic_perspectives/2004/ep_4qtr2004_part3_DeYoung_Rice.pdf
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    References listed on IDEAS

    as
    1. 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.
    2. 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.
    3. Lawrence J. Radecki, 1999. "Banks' payments-driven revenues," Staff Reports 62, Federal Reserve Bank of New York.
    4. Kevin Stiroh, 2004. "Do Community Banks Benefit from Diversification?," Journal of Financial Services Research, Springer;Western Finance Association, vol. 25(2), pages 135-160, April.
    5. John H. Boyd & Mark Gertler, 1994. "Are banks dead? Or are the reports greatly exaggerated?," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 18(Sum), pages 2-23.
    6. Elizabeth K. Kiser, 2002. "Household switching behavior at depository institutions: evidence from survey data," Finance and Economics Discussion Series 2002-44, Board of Governors of the Federal Reserve System (U.S.).
    7. Hancock, Diana & Humphrey, David B., 1997. "Payment transactions, instruments, and systems: A survey," Journal of Banking & Finance, Elsevier, vol. 21(11-12), pages 1573-1624, December.
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    Keywords

    Income; Money; Payment systems;
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