March 2008 working paper no. 330 Issn 1975-5163 Joon-Ho Hahm

 
Contents 
 
Ⅰ. Introduction ……………………………………………………………….. 1 
 
Ⅱ. Literature Review ………………………………………………………… 4 
 
Ⅲ. Methodology and Empirical Results …….………………….…….…..... 12 
1. Data ……………………………………………………………......................... 12 
2. Determinants of Non-Interest Income Ratio at the Bank Level ....…..….….….. 14 
3. Non-Interest Income Ratio and Bank Profitability and Risks ....……….……… 17 
4. Homogeneity in Bank Revenue Structure and Macroeconomic Volatility ….…. 21 
 
Ⅳ. Summary and Conclusion …………………………………….……..….. 23 
 
References .……………………………………………………………….. 25 
 
 ……………………………………………………… 37 
 

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3 
Non-Interest Income of Commercial Banks: 
Evidence from OECD Countries 
 
This paper studies implications of the changing revenue structure of 
commercial banks in the era of financial conglomeration. Utilizing a dataset of 
662 relatively large commercial banks in 29 OECD countries from 1992 to 2006, 
we find that, in addition to bank specific factors such as asset size, equity-asset 
ratio, and net interest margin, macroeconomic factors such as real GDP growth, 
inflation, and stock market capitalization are important determinants of bank 
non-interest income shares. Second, banks with higher non-interest income ratios 
exhibit not only higher average return on asset and equity-asset ratios, but also 
higher variability in return on assets, resulting in little impact on bank insolvency 
risk. We also study macroeconomic implications of increasing homogeneity in 
the revenue structure of banks within countries. We find that countries with a 
more homogeneous bank revenue structure tend to show higher inflation 
volatility. Overall these findings suggest that expanding toward non-interest 
income may not produce desired income diversification effects at the bank level. 
Furthermore, excessive convergence of revenue structure across banks may 
potentially undermine macroeconomic stability.