The Chicken or the Egg? The Trade-Off between Bank Non Interest Income and Net Interest Margins

Abstract

This study considers the time series relationship between bank non interest income and bank net interest margins in Australia using panel vector autoregressions. It is found that increases in bank non interest income are being used to supplement decreases in net interest margins, but that the magnitude of the increase in non interest income is smaller than the decrease in net interest margins. It is also found that increases in non interest income pre-date declines in margin income, suggesting that Australian banks were pro-active in the process of disintermediation. The agency risks of increased bank non interest income are explored from the perspectives of regulators, consumers, bank shareholders, borrowers and bank management.