Financial Structure Change and Banking Income: A Canada-U.S. Comparison

Abstract

Data suggest that the Canadian financial structure, and particularly indirect finance (e.g., banking), have become more market-oriented. We associate this financial trend in part with the regulatory changes that have occurred in Canada since the 1980s. Financial intermediaries are increasingly involved with financial market activities -- e.g. off-balance sheet (OBS) activities such as underwriting securities. For this reason, we analyze the non-interest income attributable to financial market activities. We find that the variance of Canadian banks' aggregate operating-income growth is rising because of the increased contribution of non-interest income. This component is by nature quite volatile compared to interest income. Consequently, our analysis corroborates the U.S. finding of Stiroh (2004), and Stiroh and Rumble (2005): By contributing to banking income volatility, market-oriented activities do not necessarily yield straightforward diversification benefits to Canadian banks.