Financial Structure Change and Banking Income: a Canada-U.S. Comparison
Data suggest that the Canadian financial structure, and particularly indirect finance (e.g., banking), have become more market-oriented. we associate this financiel trend in part with the regulatory changes that have occured in Canada since the 1980s. Financial intermediaries are increasingly involved with financial market activities --e.g. off-balance sheet (OBS) activities such as underwriting securities. For this reason, we analyze the noninterest income attributable to financial market activities. We find that the variance of Canadian banks' aggregate operating-income growth is rising because of the increased contribution of noninterest income. This component is by nature quite volatile compared to interest income. Consequently, our analysis corroborates the U.S. finding of Stiroh (2004), and Stiroh and Rumble (2005): By contributing to banking income volatility, market-oriented activities do not necessarily yield straightforward diversification benefits to Canadian banks.
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