Banks’ Non-Interest Income and Systemic Risk (Brunnermeier M. K., Dong G., Palia D.)

Bank Profitability Financial Crises Risk-taking and Risk Management

Abstract This paper examines the contribution of non-interest income to systemic bank risk. Using the ∆CoVaR measure of Adrian and Brunnermeier (2010) as our proxy for systemic risk, we find banks with a higher non-interest income to interest income ratio have a higher contribution to systemic risk. This suggests that activities that are not traditionally associated with banks (such as deposit taking and lending) are associated with a larger contribution to systemic risk. When we decompose total non-interest income into three components, we find trading income and investment banking and venture capital income to be significantly related to systemic risk. The economic impact on systemic risk of investment banking and venture capital income is higher than that of trading income. Finally we find the impact of non-interest income on systemic risk to be prevalent in the 1990 and 2007 financial crises (which were bank based) and not in the case before the 2001 high tech bubble bust. These effects occur one-year before each crisis and not during the recession, showing their countercyclical contribution to systemic risk build-up.


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Libref/ Brunnermeier M. K., Dong G., Palia D. (2011) "Banks’ Non-Interest Income and Systemic Risk", pp. 1 - 40
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