Non-Interest Income of Commercial Banks:Evidence from OECD Countries

This paper studies implications of the changing revenue structure of commercial banks in the era of financial conglomeration. Utilizing a dataset of 662 relatively large commercial banks in 29 OECD countries from 1992 to 2006, we find that, in addition to bank specific factors such as asset size, equity-asset ratio, and net interest margin, macroeconomic factors such as real GDP growth, inflation, and stock market capitalization are important determinants of bank non-interest income shares. Second, banks with higher non-interest income ratios exhibit not only higher average return on asset and equity-asset ratios, but also higher variability in return on assets, resulting in little impact on bank insolvency risk. We also study macroeconomic implications of increasing homogeneity in the revenue structure of banks within countries. We find that countries with a more homogeneous bank revenue structure tend to show higher inflation volatility. Overall these findings suggest that expanding toward non-interest income may not produce desired income diversification effects at the bank level. Furthermore, excessive convergence of revenue structure across banks may potentially undermine macroeconomic stability.