Nontraditional Banking Activities and Bank Failures During the Financial Crisis

42 Pages Posted: 2 Apr 2012 Last revised: 29 Mar 2015

See all articles by Gokhan Torna

Gokhan Torna

SUNY at Stony Brook University - College of Business

Robert DeYoung

University of Kansas School of Business

Abstract

There is general agreement among bank researchers that revenues from fee-based activities are more volatile than revenues from more traditional interest-based (loans and deposits) activities. We test whether noninterest income was a determining factor in the hundreds of U.S. commercial bank failures during the financial crisis. We separate noninterest income into three categories: fee income from traditional banking activities like deposit accounts and lines of credit; fee-for-service income from nontraditional activities like brokerage and insurance, and stakeholder income from nontraditional activities that require banks to make asset investments. We find that fee-for-service income significantly and substantially reduced the probability that healthy banks failed or became financially distressed, while stakeholder income significantly and substantially increased the probability that distressed banks failed. These results indicate that the risk-return characteristics of noninterest income vary in idiosyncratic ways that have not been recognized or accounted for in prior research. Our results also suggest that bank capital charges should be larger, and supervisory responses at distressed banks should be prompter, for banks that engage in what we define here as stakeholder activities.

Keywords: Bank failure, nontraditional banking activities, noninterest income

JEL Classification: G01, G21, G28

Suggested Citation

Torna, Gokhan and DeYoung, Robert, Nontraditional Banking Activities and Bank Failures During the Financial Crisis. Journal of Financial Intermediation, Vol. 22, No. 3, 2013. Available at SSRN: https://ssrn.com/abstract=2032246 or http://dx.doi.org/10.2139/ssrn.2032246

Gokhan Torna (Contact Author)

SUNY at Stony Brook University - College of Business ( email )

250 Harriman Hall
Stony Brook, NY 11777
United States
631-632-5304 (Phone)
631-632-9412 (Fax)

Robert DeYoung

University of Kansas School of Business ( email )

Capitol Federal Hall
1654 Naismith Drive
Lawrence, KS 66045
United States
785-864-1806 (Phone)

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