The Impact of Fee Income Share on EU Banks' Performance and Its Implications for Drivers of Banks' Business Model Changes

Abstract

This paper contributes to the current literature dealing with drivers of bank business model changes. We analyse the relationship between fee and commission income share and banks' performance in terms of profitability, risk and risk-adjusted profitability in the European Union. We applied the System Generalized Method of Moments to a unique data set of 329 EU banks in the period 2005-2014, which resulted in three key findings. First, we did not find any diversification benefits by increasing the fee income share. Therefore, we can conclude that the increase in fee income share observed in recent years in EU banks was driven mainly by external factors, such as increased competition, rather than by internal reasons. Second, higher reliance on equity financing and better quality of provided loans enhance banks' performance. Third, bank business strategies and macroeconomic factors are crucial determinants of banks' performance.