Banks' Non-Interest Income and Systemic Risk

Abstract

This paper finds non-interest income to be positively correlated with total systemic risk for a large sample of U.S. banks. Decomposing total systemic risk into three components, we find that non-interest income has a positive relationship with a bank’s tail risk, a positive relationship with a bank’s interconnectedness risk, and an insignificant or positive relationship with a bank’s exposure to macroeconomic and finance factors. These results are generally robust to endogenizing for non-interest income and for trading and other non-interest income activities.

Keywords: Systemic Risk, Banks, Non-Interest Income, Risk-Spillover, Capital Requirements

JEL Classification: G01, G10, G18, G20, G28, G32, G38