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Non-interest income and total income stability

  • Rosie Smith
  • Christos Staikouras
  • Geoffrey Wood
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    Banks can differ markedly in their sources of income. Some focus on business lending, some on household lending, and some on fee-earning activities. Increasingly, however, most banks are diversifying into fee-earning activities. Such diversification is either justified (by the bank) or welcomed (by commentators), or both, as reducing the bank's exposure to risk. Diversification across various sources of earnings is welcomed for, it is claimed, diversification reduces risk. Whether it does of course depends on how independent of each other the various earnings sources are. Traditionally fee income has been very stable; but, also traditionally, it has been a small part of the earnings stream of most banks. Has non-interest income remained stable, or at least uncorrelated with interest income, as banks have increased its importance in their earnings? This paper examines the variability of interest and non-interest income, and their correlation, for the banking systems of EU countries for the years 1994-98. It is found that the increased importance of non-interest income did, for most but not all categories of bank, stabilise profits in the European banking industry in those years. It is not, however, invariably more stable than interest income.

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    File URL: http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/2003/wp198.pdf
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    Paper provided by Bank of England in its series Bank of England working papers with number 198.

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    Date of creation: Aug 2003
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    Handle: RePEc:boe:boeewp:198
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    1. George G. Kaufman & Larry R. Mote, 1994. "Is banking a declining industry? A historical perspective," Economic Perspectives, Federal Reserve Bank of Chicago, issue May, pages 2-21.
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    7. Mester, Loretta J., 1992. "Traditional and nontraditional banking: An information-theoretic approach," Journal of Banking & Finance, Elsevier, vol. 16(3), pages 545-566, June.
    8. Rebecca S. Demsetz & Philip E. Strahan, 1995. "Diversification, size, and risk at bank holding companies," Research Paper 9506, Federal Reserve Bank of New York.
    9. Rodney N. Johnson & David R. Meinster, 1974. "Bank Holding Companies: Diversification Opportunities in Nonbank Activities," Eastern Economic Journal, Eastern Economic Association, vol. 1(4), pages 316-323, October.
    10. Heidi Taylor Aggeler & Ron Feldman, 1998. "Record bank profitability: how, who and what does it mean?," Fedgazette, Federal Reserve Bank of Minneapolis, issue Apr.
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