Bank Activity and Funding Strategies : The Impact on Risk and Returns

This paper examines the implications of bank activity and short-term funding strategies for bank risk and returns using an international sample of 1,334 banks in 101 countries leading up to the 2007 financial crisis. Expansion into non-interest income generating activities such as trading increases the rate of return on assets, and it may offer some risk diversification benefits at very low levels. Non-deposit, wholesale funding, by contrast, lowers the rate of return on assets, although it can offer some risk reduction at commonly observed low levels of non-deposit funding. A sizeable proportion of banks, however, attract most of their short-term funding in the form of non-deposits at a cost of enhanced bank fragility. Overall, banking strategies that rely prominently on generating non-interest income or attracting non-deposit funding are very risky, which is consistent with the demise of the U.S. investment banking sector.

Bibliographic Details

Main Authors:	Huizinga, Harry, Demirgüç-Kunt, Asli
Language:	English
Published:	2009-02-01
Subjects:	ACCOUNTING, AGENCY PROBLEMS, ANNUAL INFLATION RATE, ANNUAL STATEMENTS, ASSET GROWTH, ASSET RATIO, ASSET-LIABILITY MATCHING, ASSETS RATIO, BALANCE SHEET, BANK ACTIVITIES, BANK ACTIVITY, BANK ASSETS, BANK CAPITALIZATION, BANK CREDIT, BANK CUSTOMERS, BANK DATA, BANK DEPOSITS, BANK EQUITY, BANK FUNDING, BANK HOLDING, BANK HOLDING COMPANIES, BANK HOLDING COMPANY, BANK INTERMEDIATION, BANK LENDING, BANK LIQUIDITY, BANK LOANS, BANK MERGERS, BANK POLICY, BANK RATE, BANK REGULATION, BANK REGULATIONS, BANK RISK, BANK RUN, BANK SUPERVISION, BANKING MODELS, BANKING SECTOR, BANKRUPTCY, BANKS, BORROWINGS, BUSINESS CYCLE, CAPITAL ALLOCATION, CAPITAL ASSETS, CAPITAL MARKET, CAPITAL MARKETS, CAPITAL REQUIREMENTS, CDS, CENTRAL BANK, CERTIFICATES OF DEPOSIT, CHECKS, COMMERCIAL BANK, COMMERCIAL BANKING, COMMERCIAL BANKS, COMPOSITION OF DEBT, CONFLICT OF INTEREST, CONSUMER, CONTRIBUTION, CONVERSIONS, COOPERATIVE BANKS, CORE DEPOSITS, CORPORATE GOVERNANCE, COST STRUCTURE, COUNTRY FIXED EFFECTS, CREDIT INSTITUTION, CREDIT INSTITUTIONS, CREDITORS, CREDITWORTHINESS, DEBT, DEPENDANT, DEPOSIT, DEPOSIT FUNDING, DEPOSIT INSURANCE, DEPOSIT INTEREST, DEPOSIT INTEREST RATES, DEPOSITORS, DEPOSITS, DEVELOPING COUNTRIES, DEVELOPING COUNTRY, DIVERSIFICATION BENEFITS, DIVERSIFIED INCOME, DIVIDEND, DIVIDEND PAYMENTS, DUMMY VARIABLES, EARNING ASSETS, EARNINGS, ECONOMIC CONDITIONS, ECONOMIC DEVELOPMENT, EXPOSURE, FACTORS OF PRODUCTION, FEDERAL RESERVE, FEDERAL RESERVE BANK, FEDERAL RESERVE BANK OF NEW YORK, FEE INCOME, FINANCIAL ACTIVITIES, FINANCIAL CONGLOMERATES, FINANCIAL CRISIS, FINANCIAL DEVELOPMENT, FINANCIAL INSTITUTION, FINANCIAL INSTITUTIONS, FINANCIAL INTERMEDIATION, FINANCIAL MARKET, FINANCIAL SAFETY NET, FINANCIAL SERVICE, FINANCIAL SERVICES, FINANCIAL SERVICES INDUSTRY, FINANCIAL STUDIES, GROSS DOMESTIC PRODUCT, GROWTH RATE, HIGH INTEREST RATE, INCOME INCREASES, INCOME STREAM, INCOME STREAMS, INCOME-GENERATING ACTIVITIES, INFLATION, INFLATION RATE, INSTITUTIONAL DEVELOPMENT, INSTITUTIONAL ENVIRONMENT, INSTRUMENT, INSURANCE, INSURED DEPOSITS, INTEREST INCOME, INTEREST INCOMES, INTEREST RATE, INTEREST RATES, INTERNATIONAL BANK, INTERNATIONAL BANKS, INVESTMENT BANK, INVESTMENT BANKING, INVESTMENT BANKS, ISLAMIC BANKS, LEGAL PROTECTION, LEGAL SYSTEM, LIABILITY, LIABILITY SIDE, LIQUID ASSETS, LIQUIDATION, LIQUIDITY CRISIS, LIQUIDITY MANAGEMENT, LOAN, LONG-TERM INSTRUMENTS, MACROECONOMIC CONTROL, MACROECONOMIC CONTROLS, MACROECONOMIC DATA, MACROECONOMIC ENVIRONMENT, MACROECONOMIC VARIABLES, MARKET ENVIRONMENT, MARKET INTEREST, MARKET INTEREST RATES, MARKET VALUATION, MARKET VALUATIONS, MARKET VALUE, MINIMUM CAPITAL REQUIREMENTS, MINORITY SHAREHOLDER, MINORITY SHAREHOLDER PROTECTION, MONEY MARKET, MONEY MARKET INSTRUMENTS, MONEY MARKET RATES, MORTGAGE BANKS, MORTGAGE-BACKED SECURITIES, OPERATING INCOME, OVERHEAD COSTS, POLITICAL ECONOMY, POSITIVE COEFFICIENT, POSITIVE COEFFICIENTS, PRESENT VALUE, PROBABILITY, PROFITABILITY, RATE OF INFLATION, RATE OF RETURN, RATES OF RETURN, REAL ESTATE, REAL ESTATE MORTGAGE, REGULATORS, REGULATORY OVERSIGHT, REGULATORY RESTRICTIONS, RESEARCH ASSISTANCE, RETAIL BANK, RETURN ON ASSETS, RETURN ON EQUITY, RETURNS, RISK DIVERSIFICATION, RISK REDUCTION, RISK TAKING, SAFETY NET, SAVINGS, SAVINGS BANKS, SECURITIES, SECURITIES MARKETS, SHARE OF INVESTMENT, SHAREHOLDER, SHAREHOLDER RIGHTS, SHAREHOLDERS, SHAREHOLDERS RIGHTS, SHORT-TERM BONDS, SHORT-TERM INSTRUMENTS, SOLVENCY, STOCK EXCHANGE, STOCK EXCHANGE LISTING, STOCK MARKET, STOCK PRICE, STOCK PRICES, STOCK RETURN, STOCK RETURNS, SUBORDINATED DEBT, SUBSIDIARIES, SUPERVISORY AGENCY, SUPERVISORY AUTHORITIES, TAX, TRADING, TRADING ACTIVITIES, TRADING INCOME, TRADITIONAL BANKING, UNION, UNIVERSAL BANKING, VALUATION, VALUATIONS, VOLATILITY, WHOLESALE FUNDING, WORLD DEVELOPMENT INDICATORS,
Online Access:	http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20090211150244 https://hdl.handle.net/10986/4033
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