Non-interest income and bank performance during the financial crisis

ABSTRACT

This article investigates how the non-interest income influences risk and return of U.S. bank holding companies during the financial crisis of 2007–2009, based on the bank-level panel data. Our analysis shows that the non-interest incomes have a positive impact on bank risk and return during the crisis period. Furthermore, non-interest incomes related to nontraditional activities such as trading and investment banking activities have an insignificant impact on bank risk and returns. This study suggests that non-interest income is not the source of bank instability and low returns during the financial crisis.

KEYWORDS:

• Non-interest income
• bank holding companies
• bank risk
• bank return
• financial crisis

JEL CLASSIFICATION:

• G01
• G20
• G21

Acknowledgements

I thank Andrew Karolyi and Jie Gan for insightful comments at 2015 Doctoral Student Consortium of Asia/Pacific Finance Management Association.

Disclosure statement

No potential conflict of interest was reported by the authors. This paper is based on the last chapter of Bokyung Park's dissertation at Seoul National University.

Notes

¹ https://research.stlouisfed.org/fred2/series/USNIM.

² The U.S. BHCs are obligated to file their financial structure each quarter to the Federal Reserve. Since BHCs report year-to-date income statement and balance sheet, we use only year-end FR Y-9C reports for annual data of BHCs. FR Y-9C report requires top-tier holding companies to report a consolidated financial statement because one bank holding company may own other banks with the exception of lower-tiered bank holding companies with total assets of $1 billion or more until the year 2005. To avoid double-counting, we only include top-tier BHCs in our sample. Our sample period is limited due to the fact that banks report the non-interest income related to investment banking starting from 2001, after the introduction of the GLB Act of 1999.

³ CRSP-FRB link is available at http://www.newyorkfed.org/research/banking_research/datasets.html.

⁴ In the Appendix, Table A1 provides a complete list of components of non-interest income. Since banks are required to file specific information of non-interest income, each component of non-interest income is distinguishable.

⁵ To confirm Stiroh (2006)'s findings in our tests,  we repeat tests for column (1) and (5) over the original Stiroh’s sample period (1997–2004). The regression results are shown on Appendix Table A2.

⁶ An increase of 10 percentage point in non-interest income share leads to a 0.112 percentage point increase in weekly stock return.

Additional information

Funding

This work was supported by the Institute of Finance and Banking, and the Institute of Management Research, Seoul National University.