Banks’ Non-Interest Income and Systemic Risk

33 Pages Posted: 23 Mar 2011 Last revised: 3 Apr 2015

See all articles by Markus K. Brunnermeier

Markus K. Brunnermeier

Princeton University - Department of Economics

G. Nathan Dong

Columbia University

Darius Palia

Rutgers University, Newark, School of Business-Newark, Department of Finance & Economics; Columbia University - Law School

Date Written: January 31, 2012

Abstract

This paper documents that banks with higher non-interest income (noncore activities like investment banking, venture capital and trading activities) have a higher contribution to systemic risk than traditional banking (deposit taking and lending). After decomposing total non-interest income into two components, trading income and investment banking and venture capital income, we find that both components are roughly equally related to systemic risk. These results are robust to endogeneity concerns when we use a difference-in-difference approach with the Lehman bankruptcy proxying for an exogenous shock. We also find that banks with higher trading income one-year prior to the recession earned lower returns during the recession period. No such significant effect was found for investment banking and venture capital income.

Keywords: Systemic Risk, Banks, Non-interest Income, Risk-spillover, Capital requirements

JEL Classification: G01, G10, G18, G20, G28, G32, G38

Suggested Citation

Brunnermeier, Markus Konrad and Dong, Gang Nathan and Palia, Darius, Banks’ Non-Interest Income and Systemic Risk (January 31, 2012). AFA 2012 Chicago Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1786738 or http://dx.doi.org/10.2139/ssrn.1786738

Markus Konrad Brunnermeier (Contact Author)

Princeton University - Department of Economics ( email )

Bendheim Center for Finance
Princeton, NJ
United States
609-258-4050 (Phone)
609-258-0771 (Fax)

HOME PAGE: http://www.princeton.edu/¡­markus

Gang Nathan Dong

Columbia University ( email )

722 W 168th Street
New York, NY 10032
United States

Darius Palia

Rutgers University, Newark, School of Business-Newark, Department of Finance & Economics ( email )

111 Washington Street
MEC 134
Newark, NJ 07102
United States
973-353-5981 (Phone)
973-353-1233 (Fax)

Columbia University - Law School ( email )

435 W 116th St.
New York, NY 10027
United States

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