Bank activity and funding strategies : the impact on risk and returns, Vol. 1 of 1

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Bank activity and funding strategies : the impact on risk and returns

Author:	Demirguc-Kunt, Asli; Huizinga, Harry;	Collection Title:	Policy Research working paper ; no. WPS 4837
Country:	World;	Date Stored:	2009/02/11
Document Date:	2009/02/01	Document Type:	Policy Research Working Paper
Language:	English	Major Sector:	Finance
Rel. Proj ID:	1W-Program Research Proposal In Finance -- -- P107616;	Region:	The World Region
Report Number:	WPS4837	Sub Sectors:	General finance sector
SubTopics:	Access to Finance; Emerging Markets; Banks & Banking Reform; Debt Markets;	Volume No:	1 of 1

Summary: This paper examines the implications of bank activity and short-term funding strategies for bank risk and returns using an international sample of 1,334 banks in 101 countries leading up to the 2007 financial crisis. Expansion into non-interest income generating activities such as trading increases the rate of return on assets, and it may offer some risk diversification benefits at very low levels. Non-deposit, wholesale funding, by contrast, lowers the rate of return on assets, although it can offer some risk reduction at commonly observed low levels of non-deposit funding. A sizeable proportion of banks, however, attract most of their short-term funding in the form of non-deposits at a cost of enhanced bank fragility. Overall, banking strategies that rely prominently on generating non-interest income or attracting non-deposit funding are very risky, which is consistent with the demise of the U.S. investment banking sector.


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