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Bank activity and funding strategies : the impact on risk and returns, Volume 1
 
Author:Demirguc-Kunt, Asli; Huizinga, Harry; Country:World;
Date Stored:2009/02/11Document Date:2009/02/01
Document Type:Policy Research Working PaperSubTopics:Access to Finance; Emerging Markets; Banks & Banking Reform; Debt Markets;
Language:EnglishMajor Sector:Finance
Rel. Proj ID:1W-Program Research Proposal In Finance -- -- P107616;Region:The World Region
Report Number:WPS4837Sub Sectors:General finance sector
Collection Title:Policy Research working paper ; no. WPS 4837Volume No: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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