The effects of business models on bank risk before, during and after financial crisis: evidence from China

ABSTRACT

Using Chinese data from 2004 to 2016, we investigate the effects of business models on bank risk before, during and after financial crisis. Three main results emerge. First, insolvency risk and ROA volatility significantly increase if banks increase their share of non-interest income, and this relationship mainly appears during and after financial crisis. Second, a higher non-deposit funding share results in lower capital risk and credit risk and higher asset quality. However, these effects disappear after financial crisis. Finally, further analyses show that the effects of non-interest income on bank risk are mainly from assets-based non-interest income, and the effects of non-deposit funding on bank risk come primarily from money-market and short-term funding.

KEYWORDS:

• Non-interest income
• non-deposit funding
• bank risk
• financial crisis

JEL CLASSIFICATION:

• G21
• G32
• G34

Acknowledgments

We are grateful for the suggestions form Professor Cheng Li, Vikas Mehrotra, Chunxia Jiang, Jerry Lin, Yue Shen, Hong Zhao, Mingming Zhou, as well as the comments from the seminar participants at the “China Finance Review International Conference” (Shanghai Jiaotong University) and the seminar at Xi’an Jiaotong University. We also thank Moxuan Wang and Huiying Zhang from Xi’an Jiaotong University for the data collection and processing. Maoyong Cheng gratefully acknowledges the financial support from The National Social Science Fund of China (19CJY065). All errors are our own.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Based on the existing literature and our data structure, we employ the 4-year overlapping average values.

Additional information

Funding

This work was supported by the The National Social Science Fund of China [19CJY065].