The evolution of bank revenue and risk in the Asia-Pacific Region

We model the simultaneous determination of bank non-interest income and net interest income while considering bank risk, capital holdings and regulatory quality. Declines in net-interest income are associated with increased non-interest income. In contrast, net interest income shows negligible sensitivity to changes in non-interest income. Increased non-interest income is associated with increased capital holdings after the GFC (with no evidence of volatility increasing regulatory arbitrage). Non-interest income is associated with worsening loan quality. Thus, bank conglomeration does not reduce information asymmetry in the loan portfolio. We establish that the Chinese banking system did not adjust its revenue mix in the same manner as other banks in our regional sample. We argue that increased non-interest income should result in increased prudential surveillance by national regulatory authorities, with a particular focus on loan quality.

Automated summary

This study examines the impact of bank risk, capital holdings, and regulatory quality on the determination of bank non-interest income and net interest income. The findings suggest that changes in non-interest income have a negligible effect on net interest income, while increased non-interest income is associated with higher capital holdings and worsening loan quality.