Strategic Scope and Bank Performance

Abstract

One of the most dramatic trends in banking since the 1980s has been the secular movement away from core banking and interest generating activities towards enhanced reliance on non-interest-generating activities that focus largely on fees and trading profits. In this paper, we draw on a dataset covering nearly a million quarterly observations on more than 12,000 US banks and find no evidence that this shift in the bank business model harms bank profitability. To the contrary, a higher share of non-traditional bank income is associated with a higher profitability. The increase in profitability does not seem to come at the cost of substantially larger bank-level risk taking, at least not for large banks, which are the banks mostly involved in non-traditional bank business. There is also no conclusive evidence that a larger share of non-traditional income is associated with a larger contribution to systemic risk. The net benefits of non-traditional income increased in the 2000s, when both interest rates and bank margins started to decline. Estimation techniques that mitigate endogeneity concerns resulting from unobserved heterogeneity also show larger net benefits associated with greater bank reliance on generating non-traditional income.

Keywords: Core-banking activity, Non-traditional income, Bank size, Financial crises, Systemic risk

JEL Classification: G01, G21