Does non‐interest income make banks more risky? Retail‐ versus investment‐oriented banks

Abstract In this paper, we show that the impact of non‐interest income on bank risk differs between retail‐ and investment‐oriented banks. More specifically, while retail‐oriented banks such as savings, cooperative and other banks that focus on lending and deposit‐taking services become significantly more stable (in the sense of having a higher Z‐score) if they increase their share of non‐interest income, investment‐oriented banks become significantly more risky. They do not only generate a higher share of their income from non‐traditional activities, but also engage in significantly different activities from retail‐oriented banks. This might limit the potential benefits to investment‐oriented banks of diversifying into non‐interest income. Overall, therefore, our paper implies that it is important to distinguish between retail‐ and investment‐oriented banks when drawing general conclusions regarding the impact of non‐interest income on bank risk.