Discerning the impact of disaggregated non-interest income activities on bank risk and profits in the post-Gramm-Leach-Bliley Act era

Abstract

In the aftermath of the global financial crisis, many analysts have pointed towards the Gramm-Leach-Bliley Act and the associated regulatory changes in the banking industry as one of the key reasons for the financial meltdown in the US. Using an extensive dataset of all 5491 US commercial banks that were operational from June 2001 to March 2016, we examine the impact of aggregate non-interest income and its eleven disaggregated categories on bank-specific risks and profits. We find unequivocal evidence that both aggregate non-interest income and its different constituent categories increase bank risks, which is more pronounced in the post-crisis period. The results for bank profits are more mixed. The results call for a need to improve regulation and supervision of various disaggregated non-interest income activities such that the costs of engaging in these activities do not exceed their benefits for banks.