Bank Income Structure and Risk: An Empirical Analysis of European Banks

By L. Lepetit, Emmanuelle Nys, Philippe Rous, Amine Tarazi. 2008

862 citations recorded by the source corpus.

The purpose of this paper is to investigate the relationship between bank risk and product diversification in the changing structure of the European banking industry. Based on a broad set of European banks for the period 1996-2002, our study first shows that banks expanding into non-interest income activities present higher risk and higher insolvency risk than banks which mainly supply loans. However, considering size effects and splitting non-interest activities into both trading activities and commission and fee activities we show that the positive link with risk is mostly accurate for small banks and essentially driven by commission and fee activities. A higher share of trading activities is never associated with higher risk and for small banks it implies, in some cases, lower asset and default risks.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/09fbd6d4a81671c7cbca5340f6ed520c15167cc1

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Citations in the corpus

Ownership Structure and Risk in Publicly Held and Privately Owned Banks (2011, methodology): “Second, we use the ZP Score ( ZP ) as in Goyeau and Tarazi (1992) and Lepetit et al. (2008) and its two additive components 10 ( ZP1 and ZP2 ).”
Ownership, bank size, capitalization and bank performance: Evidence from India (2020, background): “Lepetit et al. (2008) also show that banks relying more on non-interest activities (commission and fee) show higher default risk relative to banks, mainly busy in lending activities, which is true for small banks.”
Which Banks Are More Risky? The Impact of Business Models on Bank Stability (2015, background): “Lepetit et al. (2008), for example, show that banks that have expanded their non-interest income activities are more risky than banks that mainly supply loans.”
Bank Market Power, Economic Growth and Financial Stability: Evidence from Asian Banks (2011, methodology): “Meanwhile, the use of the H-statistic developed by Panzar and Rosse (1987) can be an alternative method to infer the degree of market power in the banking industry (Claessens and Laeven, 2004; Molyneux and Nguyen-Linh, 2008).”
Foreign bank diversification and efficiency prior to and during the financial crisis: Does one business model fit all? (2015, background): “However, Lepetit et al. (2008) show that expanding into non-interest income activities raises volatility and insolvency risk.”
Can Banks in Emerging Economies Benefit from Revenue Diversification? (2011, neutral): “segments, which increases innovation and efficiency in the provision of services (Morgan and Samolyk 2003; Carlson 2004; Landskroner et al. 2005; Acharya et al. 2006; Lepetit et al. 2008 ).”
Is Bank Income Diversification Beneficial? Evidence from an Emerging Economy (2013, neutral): “In Europe, Lepetit et al. (2008) show that over the 1996- 2002 period, average commission income comprises 23.16% of net operating income, and 9.7% from trading income.”
Performance and Merton-type default risk of listed banks in the EU: A panel VAR approach (2009, background): “Such efforts may involve containing loan concentration and promoting product diversification (Lepetit et al., 2008).”
Bank Competition and Financial Stability: Much Ado About Nothing? (2015, neutral): “Another measure of individual bank distress extensively used in the literature is the Z-score (e.g. Boyd and Runkle, 1993; Lepetit et al., 2008; Laeven and Levine, 2009; Cihak and Hesse, 2010).”