Over the same period, net interest income rose 1.3% at larger banks and fell 1.0% at smaller banks. There are at least two explanations for the recent trends in noninterest
income. First, technological and regulatory changes opened up new
sources of noninterest income. Second, noninterest income was believed
to provide favorable attributes to a bank’s revenue stream. Having estimated equations for all countries in our dataset as well as for sub-groups of these countries, we now bring together all our results for the purpose of comparison.
- For example- Depreciation of assets and writing down asset value on the balance sheet.
- In view of the special characteristics of Asian banks noted in subsection 1.1 above, a study of banks in Asia assumes importance.
- Credit card issuers also charge penalty fees, including late fees and over-the-limit fees.
- The Asian Development Bank (1965) include Australia and New Zealand as regional members in its Charter.
It is also seen from the summary statistics that in all the groups the level of NII has come down in the post-GFC period which would suggest that banks would have gained in stability. The fact that INFLATION is not signficant should not be surprising given that the literature states that bank stability may be affected only when inflation rises above a threshold level (Dhal et al., 2011). By and large, the average what is non interest income rate of inflation in this group of countries has been around 1.5% or lower which may not impact bank stability in a signficant manner. We also include two more macroeconomics variables which we call policy variables. Monetary policy is operated by the central bank of a country and a variety of instruments are used to operationalise it dependening on the objectives (Filardo & Genberg, 2010; Morgan, 2013).
If a bank reports an operating expense-to-income ratio constantly, it will indicate that it has high operating costs, reducing its profitability. Therefore, minimization of employee costs is a bank’s strategy to reduce its operating expenses. Service fees such as late charges on loans, annual fees, and loan approval fees are used to compensate for the non-interest expenses incurred by the bank.
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Digging into terms such as non-interest income remains part of understanding bank financials. But the continuing core of most banks remains net interest income or monies earned from lending money. The predominant theory before the https://1investing.in/ GFC equaled banks focusing on non-interest income during low-interest rate periods. According to a report from the Federal Reserve Bank of Minneapolis written in 1999, the last twenty years have seen a big uptick in profitability.
Banks could use loan loss provisions as a means to smooth their revenues (Ahamed, 2017). The ratio of deposits to total assets (DEPOSITRATIO) is also included as control variable following Lee et al. (2014). Finally, ratio of non-performing loans to total loans (NPL_TL) represents asset quality following Salike and Ao (2018). Traditionally, banks have generated most of their income by issuing loans and collecting the interest payments. However, a large fraction of bank revenue also comes from so-called “noninterest income,” which includes items such as overdraft fees and ATM charges. In the wake of very low interest rates since the financial crisis, it might seem natural that banks would make greater use of noninterest income to make up for any declines they might be experiencing in interest income.
The Main Components of Noninterest Expenses
The latter studies have called for a further diversification of bank incomes as a way of improving bank stability. Further, our exercises have demonstrated the usefulness of adopting a granular approach to estimating bank stability. Confining our estimation to the aggregate level would have likely prevented us from examining differences across regions.
In
addition to its growth, noninterest income over the last decade
has been characterized by a shift in sources from charges on deposit
accounts, for example, to fees for mortgage servicing or sales of
mutual funds. There are some important directions in which this research needs to be extended further. We have stated that inflation above a certain threshold is likely to impact bank stability but the exact threshold for every group of countries or, indeed, every country needs to be determined. The role of policy variables, especially monetary policy, needs further explication especially since there is a great diversity among countries regarding the conduct of this policy. Finally, the most signficant direction in which research needs to extended is to explore the implications of the COVID-19 pandemic on bank stability. Since the full effects of the pandemic are still being played out in many countries, it might need some time for reliable data to be generated for such analysis to be carried out.
Our results (especially those in Appendix Table 12) seem to vindicate the Williams (2016) study on Australian Banks which showed that non-interest income is riskier than interest income. For Japan, Hong and Kandrac (2018) point to the peculiarity of negative interest rates leading to lower z-scores which forced banks to take more risks. The Reserve Bank of New Zealand (2019) points out that low interest rates induced banks to shift to non-interest revenues.
1 Special Characteristics of Asian Banks
It has been pointed out that the dependence of banks on noninterest incomes has come down after the 2008. Haubrich and Young (2019) shows this for the US banks wherein they indicate that noninterest income as a share of banks’ revenue has shown a declining trend. The average of NII over 1996–2007 was 231.53% which decreased to 162.11% during 2008–2020. The average of the ZSCORE, which is our dependent variable, has increased during 2008–2020 as compared to the first time period.
The bank’s profit and loss statement records the interest earned on loans and coupon payments received periodically for holding bonds as interest income. A bank’s net interest income is the difference between the interest paid on customer deposits and the interest charged on loans. That management provided in exchange for charging a non-sufficient funds fee may take the form of honoring the check and deducting the amount from the account balance, creating a negative balance. Depending on bank policies, the check may be returned to the presenting bank, and the fee is debited from the account balance. In either situation, the bank has generated a small amount of non-interest income.
Market interest rates are driven by benchmark rates such as the Federal funds rate. The Fed funds rate, or the rate at which banks lend money to one another, is determined by the rate at which the Federal Reserve pays banks interest. At a certain point, it becomes more advantageous for a bank to use the reduction of fees and charges as a marketing tool to lure new deposits, rather than as a way to increase profits.
The results of Table 4 show that all the reported equations satisfy the requirements of a good GMM model (for details see Appendix 1). It can be seen from Table 2 that, for each country, we have a panel dataset and the entire dataset is made up of a panel of panels of 1122 banks with data spread over twenty-five years from 1996 to 2020. It must be mentioned that we do face the problem of missing data for some of the variables that we employ in our models.
Commercial banks’ main targets are to hold customer deposits for longer periods and give out loans to potential borrowers, which requires very low employee compensation and involvement. The bank has to pay interest on its customer deposits because money has got time value attached to it. Therefore, the interest rate paid to customers is usually lower than what they charge on loans given.
Fee
income has accounted for most of the growth in noninterest income
since it was first measured in 1991. Almost 50 percent of the increase
in noninterest income nationally is due to heightened levels of
fee income. From a macroeconomics policy point of view, monetary policy (as captured by MONEY) plays a far more important role as far as bank stability is concerned. An increase in money supply seems to have a positive impact on bank stability when we consider all countries together. As stated earlier, the traditional transmission channel of monetary policy, which was the norm pre-GFC, depended on the central banks control over reserve requirements and the money multiplier (Albertazzi et al., 2021).
Diversified banks with a balanced approach to earning income become less reliant on interest rate fluctuations. How these trends of apparent interest replacement will play out if interest rates increase from historically low levels remains to be seen. Upgrading to a paid membership gives you access to our extensive collection of plug-and-play Templates designed to power your performance—as well as CFI’s full course catalog and accredited Certification Programs. Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling. Where i relates to the cross-section unit and t relates to time; x is a vector of financial variables and macroeconomic variables used as controls; eit, the disturbance is made up fixed effects, µi and shocks, uit. Regulations will attempt to reduce certain fees, for example, exchange fees for debit cards or account fees.