Banks’ Non-Traditional Activities Under Regulatory Changes: Impact on Risk, Performance and Capital Adequacy

44 Pages Posted: 11 Jan 2015 Last revised: 12 Mar 2017

Alaa Guidara

Université Laval

Jean-Pierre Gueyie

University of Quebec in Montreal-Department of Finance

Van Son Lai

Université Laval

Issouf Soumaré

Laval University

Date Written: March 7, 2017

Abstract

Using the big six Canadian chartered banks quarterly financial statements and daily stock market data from 1982 to 2014, we examine the impact of non-interest income on Canadian banks’ risk, performance and capital under the different major regulatory changes made to the Bank Act of Canada. We document a significant increasing trend in non-interest income with a substitution effect between non-interest income and interest income following the 1987 amendment to the Bank Act allowing commercial banks to acquire (or to merge with) investment dealers and brokerage firms. Our results show that Canadian banks’ expansion into non-traditional activities had decreased their risks and increased their performance benefitting from income diversification. Moreover, while adhering to capital adequacy regulation, reshuffling banks’ portfolio towards non-traditional activities did not reduce Canadian banks’ capital ratio, buttressing the effectiveness of capital adequacy regulation in Canada in linking banks capital allocation with their risk taking in spite of the re-regulation towards universal banking against ring-fencing.

Keywords: Non-interest income, Banking regulation, Risk exposure, Performance, Capital

JEL Classification: G21, G28, C33

Suggested Citation

Guidara, Alaa and Gueyie, Jean-Pierre and Lai, Van Son and Soumaré, Issouf, Banks’ Non-Traditional Activities Under Regulatory Changes: Impact on Risk, Performance and Capital Adequacy (March 7, 2017). Available at SSRN: https://ssrn.com/abstract=2547839 or http://dx.doi.org/10.2139/ssrn.2547839

Alaa Guidara (Contact Author)

Université Laval ( email )

Faculty of Business Administration
2325, Terrasse Street
Quebec, Quebec G1V 0A6
Canada

Jean-Pierre Gueyie

University of Quebec in Montreal-Department of Finance ( email )

School of Business Administration
Montreal, Quebec H3C 4R2
Canada
514-987-3000, x2358 (Phone)
514-987-0422 (Fax)

Van Son Lai

Université Laval ( email )

FSA ULaval
Quebec G1V 0A6
Canada
418-656-2131, x3943 (Phone)

Issouf Soumaré

Laval University ( email )

Faculty of Business Administration
Department of Finance, Insurance and Real Estate
Quebec, Quebec G1V 0A6
Canada
1418 656 3423 (Phone)
1418 656 2624 (Fax)

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