Banks Non-Interest Income and Global Financial Stability

59 Pages Posted: 30 May 2014

See all articles by Robert F. Engle

Robert F. Engle

New York University - Leonard N. Stern School of Business - Department of Economics; New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)

Fariborz Moshirian

Institute of Global Finance, UNSW Business School

Sidharth Sahgal

University of New South Wales (UNSW)

Bohui Zhang

The Chinese University of Hong Kong, Shenzhen

Date Written: April 01, 2014

Abstract

Depositary institutions over the last 15 years have increased the share of non-traditional revenue in total income. While the change in business models is a global phenomenon, it is more pronounced in countries such as the U.S., France and the U.K. In this study, we examine whether market structure can help explain the cross-country variation in the diversification activities that bank choose to pursue. The UK Independent Commission of Banking raised issues related to “ring fencing retail banking from investment banking. The EU’s Liikanen Review and the Dodd-Frank Act in the US proposed policies which may limit trading and proprietary activities of large banks. It is important to understand the motivation behind these choices because non-traditional banking activities have shouldered a large part of the blame for the 2007-2009 financial crisis, and now face the brunt of regulatory efforts. Using a sample of large banks across 38 countries this paper examines how the concentration of the banking system impacts the choice of business activities and consequently the stability of banks. We show that banks in less concentrated banking systems ( such as in the US and Japan) have higher levels of non-traditional business activities with higher shareholder returns, but at a cost of increased systemic risk. In contrast, the non-traditional business activities in highly concentrated banking systems help reduce the volatility of profits and also increase banks stability. Unlike previous research we show that there is not always a one-to-one relationship between non-traditional business activities and global banks stability.

Keywords: Global financial stability, Tournament incentives, Banking system concentration, Income diversification

JEL Classification: G01, G21, G28

Suggested Citation

Engle, Robert F. and Moshirian, Fariborz and Sahgal, Sidharth and Zhang, Bohui, Banks Non-Interest Income and Global Financial Stability (April 01, 2014). CIFR Paper No. 015/2014. Available at SSRN: https://ssrn.com/abstract=2443181 or http://dx.doi.org/10.2139/ssrn.2443181

Robert F. Engle

New York University - Leonard N. Stern School of Business - Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States

New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Fariborz Moshirian (Contact Author)

Institute of Global Finance, UNSW Business School ( email )

Sydney, NSW 2052
Australia
+61 2 93855859 (Phone)
+61 2 94877519 (Fax)

Sidharth Sahgal

University of New South Wales (UNSW) ( email )

Kensington
High St
Sydney, NSW 2052
Australia

Bohui Zhang

The Chinese University of Hong Kong, Shenzhen ( email )

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