Bank Non-Interest Income: A Source of Stability?
Posted: 31 Oct 2000
Date Written: February 2000
In the face of declining net interest margins, depository institutions have entered new product areas over the past two decades, moving from traditional lending to areas that generate non-interest revenues. The change is of importance for financial stability. The more unstable is a bank's earnings stream, the more risky the institution is. The aim of this paper is to examine whether the gradual move into fee-earning activities has reduced the variability of banking system profits. The conventional wisdom in the banking industry is that earnings from fee-based products are more stable than loan-based earnings, and that fee-based activities reduce bank risk via diversification. Our results, generally, do not support that view. However, there is the potential for diversification benefits in the case of German commercial banks, the UK buildings societies, and small German banks, although this appears to be quite limited since in all cases fee income is less stable.
Keywords: European banking, non-interest income, profitability, stability
JEL Classification: G21
Suggested Citation: Suggested Citation