Fee Income Research Articles

Ten laws of operational risk

Understanding operational risk is fundamental to its effective management. This paper sets out ten laws that govern the behavior of operational risk relating to the occurrence and detection/duration of events; the rapidity with which firms suffer losses; the lags in crystallization of losses; and internal and external drivers of concentration. The paper also considers the transference and conservation of risk; risk homeostasis (ie, control expenditure will respond to increased risk to return firms to within appetite); and the proactive taking of operational risk by firms in order to obtain fee and commission income. These laws are underpinned by event, causal and impact taxonomies. Each of the laws is illustrated through the analysis of loss and financial data for thirty-one current and former global systemically important banks, before and after the global financial crisis. Finally, the paper briefly considers the impacts of these laws on how firms should undertake stress testing and risk and controls self-assessments, and select predictive key risk indicators, and also the extent to which these laws make predictions as to the outcomes of three emerging threats.

The effect of the Fed zero-lower bound announcement on bank profitability and diversification

In this paper, we investigate the impact of the Federal Reserve's decision to maintain the zero-lower bound for at least two years on bank profitability and strategies. Using a difference in difference setting, we find that banks with lower reliance on deposit funding are more sensitive to the policy event. Our evidence suggests that, compared to high deposit banks, the reduction in net worth of low deposit banks, induced them to change their strategies toward an increase in fee income to maintain the targeted level of performance. This increase is mainly explained by fiduciary and insurance-related revenues that entail a lower threat for financial stability.

Non-Interest Income and Financial Performance of Selected Deposit Money Banks in Nigeria

This study examined the effect of e-banking income, fee income, and firm size on market value added of Deposit Money Banks in Nigeria. The eight banks categorised by Central Bank of Nigeria in 2014 to be Domestic Systematically Important banks were selected using the purposive sampling technique. Data collected from the annual reports and accounts and the Nigerian Stock Exchange website respectively for a period of 11 years (2008-2018) was used. The descriptive statistics and econometric analysis were employed using the Panel Data Analysis method. Findings from the study revealed that e-banking income and fee income each has a significant positive effect on market value added of DMBs in Nigeria. The study recommends that banks in Nigeria should further develop its internet and other electronic platforms that can improve its income from e-banking operations since e-banking income is shown to be a strong and emerging component that boosts banks' performance. Larger and investment-oriented banks should focus on increasing their share of interest income to become more stable.

What Affects Fee Income of Public Relations Corporation?: An Analysis of the Homes Report's 2019 Global Top 250 PR Agency Ranking

What Affects Fee Income of Public Relations Corporation?: An Analysis of the Homes Report's 2019 Global Top 250 PR Agency Ranking

An Analysis of Bank Fee and Commission Income in the EU and in the Czech Republic in a Low Interest Rate Environment

This paper deals with the European banking sector fee and commission income, with a special emphasis on the Czech Republic, in the 2007-2018 period. During this time span, net interest income was declining due to low nominal growth and a long period of low interest rates. We contribute to the literature when comparing the magnitude of fee income across the EU banking sectors. We come to the following key findings. First, we conclude that there is no single optimal fee income strategy. Second, we argue that Czech banks are not abnormally dependent on fee income and their outstanding profitability is rather connected with sound risk management as well as with sufficient liquidity and capital buffers. Third, we find that in the EU, fee income share followed an increasing trend after the 2007-2009 global financial crisis which might be connected with an effort to maintain desired profitability in a low interest rate environment.

Banks' noninterest income and securities holdings in a low interest rate environment: The case of Italy

AbstractUsing a sample of 440 Italian banks over the period 2007–2016, we find that low interest rates motivate banks to expand their fee and commission income and to restructure their securities portfolios. A granular breakdown suggests that banks grow noninterest income in various ways, including portfolio management, brokerage and consultancy services and increase fee income from current account and payment services. In addition, banks rebalance securities portfolios away from those “held for trading” to securities “available for sale” and “held to maturity.” Our findings allude to different behavior between large and small banks: while larger banks increase brokerage, consultancy and portfolio management services, smaller banks generate fees from customer current accounts.

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

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.

Interest Rate Pass-Through and Bank Risk-Taking under Negative-Rate Policies with Tiered Remuneration of Central Bank Reserves

We identify the effects of negative interest rate policies on bank behavior using difference-in differences identification and data on all Swiss banks. First, we find that going negative can interrupt not only the pass-through from policy to deposit rates, but also that to mortgage rates. Second, banks’ ability to offset negative deposit margins with increased mortgage margins is shown to depend on market power. Third, imposing negative rates on all central bank reserves causes banks to replace one sixth with riskier assets, and cut another sixth without replacement, shortening their balance sheets. Together with increased mortgage margins and fee income, the asset replacement preserves profits, but increases financial stability risks. Fourth, mortgage margin increases, balance sheet contractions and risk increases differ from positive rate policy. Fifth, the interruption in pass-through and the risks to financial stability can be reduced by up to 90% through tiered remuneration, charging marginal reserves only.

PoW Blockchain Network's Short-term Self-correction Mechanism

This paper empirically analyzes PoW blockchain network’s short-term self- correction mechanism through examining the impact of daily network hashrate fluctuation on miner per hashrate income. Using data from Bitcoin blockchain network, we find that network hashrate fluctuation negatively affects miner per hashrate transaction fee income and positively affects miner per hashrate block re- ward income. Further tests show that network hashrate fluctuation affects miner transaction fee income through negatively influencing both per hashrate transaction number and average transaction fee. In robustness tests, we find that user trans- action fee might have heterogenous price rigidity. Our paper provides empirical evidence for theory on PoW blockchain network’s short-term stability.

Introducing financial inclusion to MENA Islamic-banks profitability determinants

This paper assesses Islamic banks (IBs) profitability determinants by investigating bank-specific, macroeconomic, and financial inclusion variables in MENA. Data is collected from Zawya, Bankscope, The Banker, Global Findex and World Bank databases covering 73 IBs from 2008-2017. ROA and ROE are deployed as IBs’ profitability term with new predictor variables assessing financial inclusion: overall financial structure, financial service penetration, and self-service banking prevalence. Common bank-specific variables are employed that include; credit risk, liquidity, size, capital adequacy, the effect of income fees and charges, and operating costs with other macroeconomic variables; GDP, inflation, and the average world governance indicator (WGI). A dynamic panel data is applied using a GMM model. Both ROA and ROE have almost the same significant relationship with credit risk, size, capital adequacy, and effect of income fees and charges but no significance was established with Basel capital adequacy. The same significant relationship between ROA and ROE is validated with only WGI as a macroeconomic variable and self-service banking prevalence as a financial inclusion indicator. Guiding IBs executives to improve bank profitability by utilizing macroeconomic and financial inclusion factors. Results may imply the importance of new products and alternative channel development in enhancing IBs’ profitability. Few studies are found measuring the effect of bank-specific, macroeconomic, and financial inclusion variables. Thus, this paper contributes to the existing literature by introducing other dynamics affecting IBs’ profitability

Creating connections to weather the storm of marketisation

From the (un)holy trinity of REF, TEF and KEF to increasing reliance on tuition fee income, institutions have ever more incentives to compete and fewer to collaborate. Each new pressure on the sect...

Comprehending the relationship between a company and its accountants, 1894–1967: Evaluating and accommodating Foucauldian and other perspectives

This article analyses the relationship between a Scottish manufacturing company and the accountancy firm which provided it with professional services across its existence (1894–1967). It examines the professional roles fulfilled by the accountants, the work done and the fee income derived from it, in the context of the company’s history. It emphasises the importance of the services provided by accountancy firms for unlisted companies in understanding the development of professional accountancy in the United Kingdom. The material presented is used to test three different explanations of the UK accountancy profession’s rise which relate to the auditing function and has implications for historical methodology and epistemologies. The explanations explored may be categorised as economic rationalist, Foucauldian and jurisdictional points of view.

How vulnerable are you? Assessing the financial health of England’s universities

ABSTRACTThe vagaries of market forces are presenting a financially challenging environment for the higher education sector in England. Intense competition is leaving those overly dependent on tuition fee income in an exposed position. Despite a strong narrative for the need to diversify funding in the available higher education literature, empirical studies examining the degree to which universities are financially diversified are sparse and lack contemporary relevance. This study is the first to produce a National Income Diversification Index for publicly-funded, generalist universities in England. In doing so, it develops a model for a more accurate financial assessment by disaggregating third-stream revenues from core income. The findings suggest established pre-1992 universities are more financially diversified and thus in keeping with modern portfolio theory, are less vulnerable to changes in their external environment. This paper calls for policymakers to include the level of income diversification in any measure of institutional financial health.

Cost Efficiency of the Ghanaian Banking Sector: The Post-Liberalisation Experience

Using data from 1997 to 2008, this paper investigates the cost efficiency of the Ghanaian banking sector after financial liberalisation. The Ghanaian bank with the highest efficiency score is found to be operating at maximum possible efficiency. The average bank is however operating at high costs. Despite mixed evidence in the literature, there is the received wisdom that most cross-border mergers and acquisitions post-liberalisation result in failure due to factors that include poor credit quality, inadequate generation of fee income, and poor customer mix. In Ghana, the situation is different because the only foreign-acquired bank had prior knowledge of the local conditions and has managed to utilise this advantage, coupled with redundancy programmes and layoffs and without branch expansion following the acquisition, to operate at a relatively high level of cost efficiency.

What determines the profitability of Islamic banks: Lending or fee?

This paper analyses the effect of bank lending and fee income on Islamic and conventional bank's performance. The paper builds a theoretical model and provides empirical evidence to show that Islamic banks as compared to conventional banks can have a greater reliance on fee-based income than returns from loans to increase their profitability. Using data from a sample of 20 countries for the period from 2000 to 2015 for Islamic and conventional banks, we find that the bank fee is an important determinant of the profitability of an Islamic bank. Interestingly, many commonly used measures such as loan to deposit ratio do not affect the Islamic banks' profitability as much as they do for conventional banks. Our findings imply that Islamic banks' lower sensitivity to loan to deposit ratio may contribute to lower credit risk. However, an over-reliance on fee-based income may affect their growth, profitability and sustainability in the long run.

Bank earnings management using commission and fee income

PurposeThe purpose of this paper is to investigate whether banks use commission and fee (CF) income to manage reported earnings as an income-increasing or income smoothing strategy.Design/methodology/approachThe authors employ the regression methodology to detect real earnings management.FindingsThe authors find that banks use CF income for income smoothing purposes and this behaviour persists during recessionary periods and in environments with stronger investor protection. The implication of the findings is that bank non-interest income which achieves diversification gains to banks is also used to manipulate reported earnings.Research limitations/implicationsThe findings show that real earnings management is prevalent among banks in Africa. Further research into earnings management should examine real earnings management among non-financial firms in developing regions.Practical implicationsFrom an accounting standard setting perspective, the evidence suggests the need for national/international standard setters to adopt strict revenue recognition rules that ensure that banks or firms report the actual fees they make, and to discourage banks from delaying (or deferring) the collection of fee income to manage or smooth reported earnings opportunistically.Originality/valueThis study contributes to the positive accounting theory (PAT) literature which examines the accounting and non-accounting decisions that influence managers’ choice of accounting methods in financial reporting. Extending the PAT, the authors show that certain conditions can incentivize managers to engage in earning management such as during recessions and weak institutional quality or weak investor protection.

An Analysis of Non-Traditional Activities at German Savings Banks – Does the Type of Fee and Commission Income Matter?

Abstract In this paper, we use a fully anonymized dataset provided by the German Savings Banks Association (DSGV) to analyse which savings banks have expanded into fee-producing activities more quickly. In addition, we investigate whether their profitability and stability is correlated with the share of their fee and commission income. Notably, we examine whether the effect on bank profitability differs depending on the type of fee and commission income. Our results support the view that savings banks with low net interest margins are under greater pressure to expand into fee-producing activities. They further suggest that savings banks with a higher share of fee and commission income, in particular from payment services and securities business, also have a higher profitability. The Z-score also correlates positively with the share of securities business income, possibly because it responds to different shocks than net interest income and, therefore, offers a large diversification potential. Zusammenfassung In diesem Paper verwenden wir einen vollständig anonymisierten Datensatz des Deutschen Sparkassen- und Giroverbands (DSGV), um zu untersuchen, welche Sparkassen ihr Provisionsgeschäft schneller ausgebaut haben. Außerdem analysieren wir, wie stark die Profitabilität und Stabilität dieser Banken mit dem Anteil des Provisionseinkommens am gesamten operativen Einkommen korreliert sind. Zu beachten ist, dass wir dabei nach der Art des Provisionseinkommens unterscheiden. Unsere Ergebnisse stützen die Hypothese, dass Sparkassen mit einer hohen Zinsmarge unter geringerem Druck stehen, ihr Provisionsgeschäft auszubauen. Sie lassen ferner darauf schließen, dass Sparkassen mit einem Anteil an Provisionseinkommen aus dem Zahlungsverkehr und dem Wertpapiergeschäft eine höhere Profitabilität haben. Der Z-Score korreliert ebenfalls positiv mit dem Anteil an Provisionseinkommen aus dem Wertpapiergeschäft, möglicherweise weil es anderen Schocks ausgesetzt ist als das Zinseinkommen und deshalb ein großes Diversifikationspotential birgt. JEL Classification: G20, G21, G29

Macro stress testing euro area banks’ fees and commissions

This paper uses panel econometric techniques to estimate a macro-financial model for fee and commission income over total assets for a broad sample of euro area banks. Using the estimated parameters, it conducts a scenario analysis projecting the fee and commission income ratio over a three-year horizon conditional on the baseline and adverse macroeconomic scenarios used in the 2016 EU-wide stress test. The results indicate that the fee and commission income ratio is varying in particular with changes in its own lag, the short-term interest rate, stock market returns and real GDP growth. They also show that the fee and commission income ratio projections are more conservative under the adverse scenario than under the baseline scenario. These findings suggest that stress tests assuming scenario-independent fee and commission income projections are likely to be flawed.

Towards a Functional Fee Market for Cryptocurrencies

Blockchain-based cryptocurrencies must solve the problem of assigning priorities to competing transactions. The most widely used mechanism involves each transaction offering a fee to be paid once the transaction is processed, but this first-price mechanism fails to yield stable equilibria with predictable prices. We propose an alternate fee setting mechanism, StableFees, that is based on second-price auctions. We prove that our proposed protocol is free from manipulation by users and miners as the number of users and miners increases and show empirically that gains from manipulation are small in practice. We show that StableFees reduces the fees paid by users and reduces the variance of fee income to miners. Data from December 2017 shows that, if implemented, StableFees could have saved Bitcoin users \$272,528,000 USD in transaction fees while reducing the variance of miner's fee income, on average, by a factor of $7.4$. We argue that our fee protocol also has important social welfare and environmental benefits.

Current condition and development perspectives of united territorial communities

Efficiency of public authorities’ decentralization in Ukraine depends on the coherent reforming, development and activity of three social subsystems: public management, local governance, civil society. Reforming of local governance and authorities’ territorial organization based on decentralization causes new managerial challenges for central and regional authorities and local governments, including the united territorial communities (UTCs), which acquire new much broader competences and stronger financial capacity. The paper aims to define the ways to provide sustainable balanced development of united territorial communities based on the analysis of the dynamics of their forming and the rates of their efficiency. The dynamics of forming of united territorial communities is analyzed. The author reveals that it is stipulated to a great extent by the fact that law provides only for voluntary consolidation, which will further slow the process down and cause some problems. The paper explains the statement that maximum attraction of civil society institutions and business representatives to cooperation on partnership basis is an important way to improve the efficiency of local governance and form the capacity of territorial communities. The author notes that the substantial gap in the efficiency of united territorial communities is stipulated by their initial conditions and the level of available management. The paper proves that achievement of financial capacity for territorial communities is possible through filling the local budgets with revenues from single tax, fuel excise, land fee and other own income rather than solely through individual tax. The priority activity directions of local governments on strengthening of financial stability and independence of local budgets are defined. The role of prediction of changes in the structure of territories’ population in spatial development for securing of sustainable balanced development of united territorial communities is determined.