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

Demirgüc-Kunt, A. and Harry P. Huizinga

No 2009-09, Discussion Paper from Tilburg University, Center for Economic Research

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.

JEL-codes: G01 G21 G28 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban
Date: 2009

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Related works:
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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Persistent link: http://EconPapers.repec.org/RePEc:dgr:kubcen:200909

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