JOURNAL OF APPLIED BUSINESS AND ECONOMICS
Risk, Return, and Income Mix at Commercial Banks:
Cross-Country Evidence
Author(s): Rifat Gorener, Sungho Choi
Citation: Rifat Gorener, Sungho Choi, (2013) "Risk, Return, and Income Mix at Commercial Banks: Cross-Country Evidence," Journal of Applied Business and Economics, Vol. 14, Iss. 3, pp. 123-152
Article Type: Research paper
Publisher: North American Business Press
Abstract:
The paper examines whether and how increased reliance on non-interest income affects the financial
performance of banks, as measured by stock market return data for publicly traded commercial banking
companies in 42 countries. In general, we find that non-interest income is associated with riskier stock
returns at commercial banking companies, due primarily to increased market, or systematic, risk. This
finding is new to the literature, and suggests that fee-based banking activities increase banks’ exposure to
the business cycle. In contrast, we find almost no evidence linking non-interest income to changes in the
total risk, interest rate risk, or idiosyncratic risk. Our results also suggest that the stock markets
efficiently price the increased risk associated with the non-interest income market. That is, after
controlling for cross-sectional differences in risk, market returns do not fluctuate with the mix of bank
income. This result offers a potential explanation for the initial conventional wisdom among industry
participants that expansion into non-interest activities would result in an improved risk–return trade-off
at commercial banks. Finally, we find that cross-country differences in regulatory practices, economic
conditions, and social institutions influence our main results in important ways, but on average our risk–
return results appear to be robust across countries.