ISSN 1598-2769 Journal of International Economic Studies Vol. 12, No. 1, June 2008

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Determinants and Consequences of Non-Interest Income Diversification of Commercial Banks in OECD Countries*
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Joon-Ho Hahm
Professor, Graduate School of International Studies, Yonsei University jhahm@yonsei.ac.kr

This paper studies determinants and consequences of the changing income structure of commercial banks in the era of financial conglomeration. Utilizing a dataset of 662 relatively large commercial banks in 29 OECD countries from 1992 to 2006, we find that banks with relatively large asset sizes, low net interest margins, high impaired loan ratios, and high cost-income ratios tend to exhibit higher non-interest income shares. As for macroeconomic factors, banks in countries with slow economic growth, a stable inflation environment, and welldeveloped stock markets tend to show higher non-interest income shares. Second, we investigate the consequences of non-interest income expansion on bank profitability and risks. While the positive effects on profit and capital adequacy seem to become weaker under the consideration of macroeconomic factors and endogeneity problems, the adverse impact on profit variability remains robust. Overall, these findings suggest that expanding toward non-interest income may not produce desired income diversification effects, and it does not necessarily imply a shift toward superior return-risk frontiers.

Keywords: Commercial Bank, Non-interest Income, Bank Profitability, Bank Risk

* This work was financially supported by the Bank of Korea. I would like to thank participants at a seminar held by the Bank of Korea and two anonymous referees for valuable suggestions and comments. I also thank Seth Madison for excellent research assistance. All remaining errors are my own.

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