The structure of income is a foremost address within research on banks’ performance, especially with regard to effects on the resilience of banks’ earnings. Indeed, given their central position in the economy, banks shall thrive to generate sustainable earnings and control for their potential volatility. Existing studies mostly consider the weight of non‐net interest income (nonNII) as opposed to the traditional NII income source. Such aggregated nonNII is found to increase earnings risk but more granular studies conflict. We propose an original investigation of the influence of economic and financial conditions on various income types, assuming that performance may actually be driven by both the income structure and external conditions.
We focus European banks, which have long been allowed to diversify beyond retail banking. Out of a straight panel framework, we question if the influence of external conditions spreads to earnings components other than credit losses and trading income and if it does allow for diversification benefits among components. We find that each component actually evolves owing to its own equation. Furthermore, effects of single variables may cumulate over different components of earnings (e.g. GDP) or provide with diversification benefits. These effects are all the more important since they are not mitigated by operating expenses. Hence, over a regarded period, banks’ performance depends upon their structure of income and upon volatilities and correlations of influential variables. Besides controlling for ex‐ante volatility, our approach shows that a given structure of income is not necessarily more resilient than others but that selected non‐banking income may support a higher stability of Earnings
Since the 1990s', a relatively ample research has been undertaken regarding the measurement of the volatility of bank earnings over time. The comparison between traditional deposits-loans banking and financial activities is a further specific theme in bank performance research, but reaches limited consensus. Few analyses have however directly addressed the explanation of the volatility of earnings. The present paper provides with an analysis of the influence of economic and financial factors through the sub-components of net earnings and sheds a light on the sensitivity of activity types. We use a panel of European banks. European banks enable a singular insight since they have noticeably developed their offer of financial services for more than two decades, aiming at universal banking models. Our data cover the period 2005-2010 which encompasses marked upwards and downwards shifts in economic and market conditions (due to the crisis) and support the identification of sensitivities. We find that GDP growth primarily influences earnings through loan impairments. Stock markets impact commissions and, in a greater extent, trading. Our results suggest that, over the period, traditional banking was only slightly more resilient than activities relating to stock markets (fiduciary and trading). However additional significant stock markets activities may increase the exposure of banks. A negative effect of interest rates is identified for both interest income mismatch and trading for most banks. This sensitivity to interest rates may nevertheless mitigate the volatility of earnings. Our analyses evidence the importance of shaping activity mixes with great consideration of potential economic and markets impacts over multiple periods, while embedding assumptions regarding their correlation and breaches thereof. They also contribute to develop the methodology for stress tests and to the pondering about ring-fencing of activities.
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