Diversification in Banking: Is Noninterest Income the Answer?

40 Pages Posted: 15 Nov 2002

See all articles by Kevin J. Stiroh

Kevin J. Stiroh

Federal Reserve Bank of New York

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Date Written: November 14, 2002


The U.S. banking industry is steadily increasing its reliance on nontraditional activities that generate fee income, trading revenue, and other types of noninterest income. This paper assesses potential diversification benefits from this shift. At the aggregate level, declining volatility of net operating revenue reflects reduced volatility of net interest income, rather than diversification benefits from noninterest income, which is quite volatile and has become more highly correlated with net interest income. At the bank level, growth rates of net interest income and noninterest income have also become more correlated in recent years. Finally, greater reliance on noninterest income, particularly trading revenue, is associated with higher risk and lower risk-adjusted profits. These results suggest few obvious diversification benefits from the ongoing shift toward noninterest income.

Keywords: Banks, risk, diversification

JEL Classification: G21

Suggested Citation

Stiroh, Kevin J., Diversification in Banking: Is Noninterest Income the Answer? (November 14, 2002). FRB of New York Staff Report No. 154, Available at SSRN: https://ssrn.com/abstract=334420 or http://dx.doi.org/10.2139/ssrn.334420

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Federal Reserve Bank of New York ( email )

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