The Impact of Non Interest Income on Bank Risk in Australia

Abstract

This paper considers the relationship between bank revenue composition and bank risk in Australia, using data drawn from Australian bank confidential regulatory returns. It is found that those banks with lower levels of non interest income and higher revenue concentration are less risky, consistent with previous international evidence. Decreasing returns to scale in bank risk is found, with some evidence supportive of too big to fail effects. Non interest income is found to be risk increasing, but it is proposed that some types of non interest income may be risk reducing when bank specialisation effects are considered. It is concluded that care must be taken when selecting the appropriate peers for benchmarking, to reflect difference in income composition.