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

A. Demirgüc-Kunt, H.P. Huizinga

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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
PublisherMacroeconomics
Number of pages65
Volume2009-09
Publication statusPublished - 2009

Publication series

NameCentER Discussion Paper
Volume2009-09

Keywords

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

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    Demirgüc-Kunt, A., & Huizinga, H. P. (2009). Bank Activity and Funding Strategies: The Impact on Risk and Return. (CentER Discussion Paper; Vol. 2009-09). Macroeconomics.