Does non-interest income make banks more risky? Retail- versus investment-oriented banks

Matthias Köhler

No 17/2013, Discussion Papers from Deutsche Bundesbank

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.

Keywords: banks; risk-taking; business model; non-interest income; diversification (search for similar items in EconPapers)
JEL-codes: G20 G21 G28 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-ban
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdps:172013

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