Bank Activity and Funding Strategies: The Impact on Risk and Return

By Asli Demirg-Kunt, Harry Huizinga. 2009

1,271 citations recorded by the source corpus.

This paper examines the implications of bank activity and short-term funding strategies for bank risk and return using an international sample of 1334 banks in 101 countries leading up to the 2007 financial crisis. Expansion into non-interest income generating activities such as trading increases the rate of return on assets, and it may offer some risk diversification benefits at very low levels. Non-deposit, wholesale funding in contrast lowers the rate of return on assets, while it can offer some risk reduction at commonly observed low levels of non-deposit funding. A sizeable proportion of banks, however, attract most of their short-term funding in the form of non-deposits at a cost of enhanced bank fragility. Overall, banking strategies that rely prominently on generating non-interest income or attracting non-deposit funding are very risky, consistent with the demise of the U.S. investment banking sector.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/ad05bc5a7ab54d9d80d53c12ca2f8696b3adc66e

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Citations in the corpus

Banking risk and regulation: Does one size fit all? (2012, neutral): “In contrast, Demirgüç-Kunt and Huizinga (2009) find that banking strategies that rely prominently on generating non-interest income or attracting non-deposit funding create financial instability.”
Foreign bank diversification and efficiency prior to and during the financial crisis: Does one business model fit all? (2015, background): “Demirguç-Kunt and Huizinga (2010) use the share of non-deposit funding to measure diversification and find risk benefits from raising this from low levels.”
Nontraditional Banking Activities and Bank Failures During the Financial Crisis (2013, neutral): “3 While Demirguc-Kunt and Huizinga (2010) find some evidence of”
Is More Finance Better? Disentangling Intermediation and Size Effects of Financial Systems (2014, background): “The importance of traditional financial intermediation relative to these non-intermediation financial activities has declined over time as financial institutions have diversified into non-lending activities (Demirgüc-Kunt and Huizinga, 2010; Baele et al., 2007).”
Does market structure matter on banks’ profitability and stability? Emerging vs. advanced economies (2013, neutral): “See, e.g. Kosmidou et al. (2005), Pasiouras and Kosmidou (2007), and Demirguc-Kunt and Huizinga (2010) for the use of these variables.”