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 inc...

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Bibliographic Details
Main Authors:	Demirgüç-Kunt, Asli, Huizinga, Harry
Format:	Policy Research Working Paper
Language:	English
Published:	2012
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 http://hdl.handle.net/10986/4033

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Summary:	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.

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

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