Changing Bank Income Structure: Evidence from Large UK Banks?

Abstract

The UK banking industry has steadily moved from the traditional role of financial intermediation and is increasingly relying on non-traditional business activities that generate fee income, dealings profit and other types of noninterest income. Using the dataset of large British Banks for the period 1986-2012, this study investigates the changes in the bank income structure as a result of the 1986 deregulation and tease out the effect that these changes have had in relation to systemic risk. On a micro analysis, larger banks are more able to sustain high levels of noninterest income. Among the banks Lloyds and HSBC stand out as

An Interest Rate Commission Agent Banking System

“…Though the non-traditional bank collects non-interest income, the income from this source per se commission, fee and charge are volatile and sensitive to market risk. Competition among traditional banks makes the non-interest income volatile and exposes the bank to systematic risk (Jaffar et al, 2014).…”

“…Greater reliance on non-interest income, particularly commission income, is associated with higher systematic risk (Jaffar, Mabwe & Webb, 2014). Because of the high competition among traditional banks, non-interest income of the bank is volatile and exposes the bank to higher systematic risk.…”

“…Although interest income is less volatile than non-interest income, the systematic risk associated with non-interest income is higher than interest income (Jaffar et al, 2014).In traditional banking non-interest income exposed the bank to systematic risk. However, interest rate commission is non-volatile which is continues until loan settlement does not expose the bank to systematic risk.…”

“…Traditional banks that generate interest income increase the efficiency of service rendering at a slower rate. Since there is a positive association between interest and non-interest income, banks are focusing more on non-interest income-generating activities than depending only on traditional interest-based income generating activities (Jaffar et al, 2014). Banks are moving from traditional banking to non-traditional banking activities to avoid credit risks and to collect noninterest income.…”

An Interest Rate Commission Agent Banking System

“…In traditional banking activities, banks are limited to buy deposit from clients to sell it to an entrepreneur at the credit price, whereas, in non-traditional banking activities banks are involved in selling their service to their client according to terms and tariff of the bank. Though interest income is non-volatile than non-interest income, the systematic risk associated with non-interest income is higher than interest income [23].…”