Bank Activity and Funding Strategies: The Impact on Risk and Return

Asli Demirguc-Kunt and Harry P. Huizinga

No 7170, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper examines the implications of bank activity and short-term funding strategies for bank risk and return using an international sample of 1334 banks in 101 countries leading up to the 2007 financial crisis. Expansion into non-interest income generating activities such as trading increases the rate of return on assets, and it may offer some risk diversification benefits at very low levels. Non-deposit, wholesale funding in contrast lowers the rate of return on assets, while it can offer some risk reduction at commonly observed low levels of non-deposit funding. A sizeable proportion of banks, however, attract most of their short-term funding in the form of non-deposits at a cost of enhanced bank fragility. Overall, banking strategies that rely prominently on generating non-interest income or attracting non-deposit funding are very risky, consistent with the demise of the U.S. investment banking sector.

Keywords: bank fragility; financial crisis; non-interest income share; universal banking; wholesale funding (search for similar items in EconPapers)
JEL-codes: G1 G21 G28 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban
Date: 2009-02
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Working Paper: Bank Activity and Funding Strategies: The Impact on Risk and Return (2009)
Working Paper: Bank activity and funding strategies: the impact on risk and returns (2009)
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