Determinants and Consequences of Non-Interest Income Diversification of Commercial Banks in OECD Countries

30 Pages Posted: 28 Nov 2017

See all articles by Joon-Ho Hahm

Joon-Ho Hahm

Yonsei University - Graduate School of International Studies

Date Written: June 30, 2008

Abstract

This paper studies determinants and consequences of the changing income structure of commercial banks in the era of financial conglomeration. Utilizing a dataset of 662 relatively large commercial banks in 29 OECD countries from 1992 to 2006, we find that banks with relatively large asset sizes, low net interest margins, high impaired loan ratios, and high cost-income ratios tend to exhibit higher non-interest income shares. As for macroeconomic factors, banks in countries with slow economic growth, a stable inflation environment, and well- developed stock markets tend to show higher non-interest income shares. Second, we investigate the consequences of non-interest income expansion on bank profitability and risks. While the positive effects on profit and capital adequacy seem to become weaker under the consideration of macroeconomic factors and endogeneity problems, the adverse impact on profit variability remains robust. Overall, these findings suggest that expanding toward non-interest income may not produce desired income diversification effects, and it does not necessarily imply a shift toward superior return-risk frontiers.

Keywords: Commercial Bank, Non-interest Income, Bank Profitability, Bank Risk

JEL Classification: G18, G21

Suggested Citation

Hahm, Joon-Ho, Determinants and Consequences of Non-Interest Income Diversification of Commercial Banks in OECD Countries (June 30, 2008). East Asian Economic Review, Vol. 12, No. 1, pp. 3-31, June 2008. Available at SSRN: https://ssrn.com/abstract=3077837 or http://dx.doi.org/10.2139/ssrn.3077837

Joon-Ho Hahm (Contact Author)

Yonsei University - Graduate School of International Studies ( email )

Seoul
Korea

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