Bank activity and funding strategies: The impact on risk and return
Demirgüc-Kunt,A. Huizinga,H.P.
Demirgüc-Kunt,A.
Huizinga,H.P.
Abstract
This paper examines the implications of bank activity and short-term funding strategies for bank risk and return using an international sample of 1,334 banks in 101 countries leading up to the 2008 financial crisis. Expansion into noninterest income-generating activities such as trading increases the rate of return on assets, and it could offer some risk diversification benefits at very low levels. Nondeposit, wholesale funding in contrast lowers the rate of return on assets, while it can offer some risk reduction at commonly observed low levels of nondeposit funding. A sizable proportion of banks, however, attract most of their short-term funding in the form of nondeposits at a cost of enhanced bank fragility. Overall, banking strategies that rely prominently on generating noninterest income or attracting nondeposit funding are very risky, consistent with the demise of the US investment banking sector.
Description
Appeared earlier as CentER DP 2009-09
Date
2010
Journal Title
Journal ISSN
Volume Title
Publisher
Research Projects
Organizational Units
Journal Issue
Keywords
SDG 10 - Reduced Inequalities
Citation
Demirgüc-Kunt, A & Huizinga, H P 2010, 'Bank activity and funding strategies : The impact on risk and return', Journal of Financial Economics, vol. 98, no. 3, pp. 626-650.