Bank Activity and Funding Strategies

The Impact on Risk and Return

A. Demirgüc-Kunt, H.P. Huizinga

Research output: Working paperDiscussion paperOther research output

Abstract

This paper examines the implications of bank activity and short-term funding strategies for bank risk and return using an international sample of 1334 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 in contrast lowers the rate of return on assets, while 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, consistent with the demise of the U.S. investment banking sector.
Original languageEnglish
Place of PublicationTilburg
PublisherEBC
Number of pages65
Volume2009-01
Publication statusPublished - 2009

Publication series

NameEBC Discussion Paper
Volume2009-01

Fingerprint

Funding
Risk and return
Return on assets
Rate of return
Non-interest income
Financial crisis
Deposits
Fragility
Bank risk
Banking
Risk diversification
Investment banking
Diversification benefits
Proportion
Costs
Risk reduction
Banking sector

Keywords

  • non-interest income share
  • wholesale funding
  • diversification
  • universal banking
  • bank fragility
  • financial crisis

Cite this

Demirgüc-Kunt, A., & Huizinga, H. P. (2009). Bank Activity and Funding Strategies: The Impact on Risk and Return. (EBC Discussion Paper; Vol. 2009-01). Tilburg: EBC.
Demirgüc-Kunt, A. ; Huizinga, H.P. / Bank Activity and Funding Strategies : The Impact on Risk and Return. Tilburg : EBC, 2009. (EBC Discussion Paper).
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Demirgüc-Kunt, A & Huizinga, HP 2009 'Bank Activity and Funding Strategies: The Impact on Risk and Return' EBC Discussion Paper, vol. 2009-01, EBC, Tilburg.

Bank Activity and Funding Strategies : The Impact on Risk and Return. / Demirgüc-Kunt, A.; Huizinga, H.P.

Tilburg : EBC, 2009. (EBC Discussion Paper; Vol. 2009-01).

Research output: Working paperDiscussion paperOther research output

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AB - This paper examines the implications of bank activity and short-term funding strategies for bank risk and return using an international sample of 1334 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 in contrast lowers the rate of return on assets, while 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, consistent with the demise of the U.S. investment banking sector.

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Demirgüc-Kunt A, Huizinga HP. Bank Activity and Funding Strategies: The Impact on Risk and Return. Tilburg: EBC. 2009. (EBC Discussion Paper).