Diversification in Banking: Is Noninterest Income the Answer?

Posted: 11 Feb 2003

See all articles by Kevin J. Stiroh

Kevin J. Stiroh

Federal Reserve Bank of New York

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Abstract

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?. Journal of Money, Credit, and Banking, Forthcoming. Available at SSRN: https://ssrn.com/abstract=367223

Kevin J. Stiroh (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
(212) 720-6633 (Phone)
(212) 720-8363 (Fax)

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