The impact of non interest income on bank risk in Australia
Date of this Version
This paper considers the relationship between bank revenue composition and bank risk in Australia, using data drawn from Australian bank confidential regulatory returns. It is found that those banks with lower levels of non interest income and higher revenue concentration are less risky, contrary to mean-variance portfolio theory but consistent with previous international evidence. Decreasing returns to scale in bank risk is found, with results suggesting that the major Australian banks have reached the scale point where size is risk increasing. Non interest income is found to be risk increasing, but some evidence is found that trading and investment income may be risk reducing in certain circumstances, particularly when bank specialisation effects are considered. It is also suggested that care must be taken when selecting the appropriate peers for performance benchmarking, as institutionally based peer analysis is likely to be misleading unless bank specialisation is considered.
This document has been peer reviewed.