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

Matthias Köhler

Review of Financial Economics, 2014, vol. 23, issue 4, 182-193

Abstract: In this paper, we show that the impact of non-interest income on bank risk differs between retail- and investment-oriented banks. More specifically, while retail-oriented banks such as savings, cooperative and other banks that focus on lending and deposit-taking services become significantly more stable (in the sense of having a higher Z-score) if they increase their share of non-interest income, investment-oriented banks become significantly more risky. They do not only generate a higher share of their income from non-traditional activities, but also engage in significantly different activities from retail-oriented banks. This might limit the potential benefits to investment-oriented banks of diversifying into non-interest income. Overall, therefore, our paper implies that it is important to distinguish between retail- and investment-oriented banks when drawing general conclusions regarding the impact of non-interest income on bank risk.

Keywords: Banks; Risk-taking; Business model; Non-interest income; Income diversification (search for similar items in EconPapers)
JEL-codes: G G G (search for similar items in EconPapers)
Date: 2014
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