The Study On Income Structure And Risk Of Commercial Banks

In recent years, with all the economic development in China, marketization of interest rates, banking reforms, internationalization of RMB, strict capital requirement and with other financial reforms taking place; And the development of capital market led to banking disintermediation. Which gradually makes commercial banks to change their business model, from depending on expansion of loans to business diversification, services diversification and income diversification.Through the exploration of business diversification, commercial banks in China have kept trying to go beyond the boundaries of traditional services of commercial banking businesses. Income flows from different businesses combine to an income portfolio and the income structure are becoming more diversified. While from the development trend of international banking, before the financial crisis, international banking was actively looking for new businesses and revenue flows. The proportion of non-interest income kept increasing, forming a diversified income structure. But international banking greatly engaged in investment banking and trading businesses, banking function alienation, increased systematic risk. After the financial crisis, international banking started to reflect on the relation between income diversification and bank risk and started a significant regulatory reform.Therefore, under this background of separate operation and separate supervision, studying the changes in China’s banking income structure, exploring the relationship between changes in banking income structure and bank performance and risk are of important theoretical and practical significance to steadying income, spreading risk and achieving sustainable development of commercial banks in China, as well as to maintaining the safety of the entire financial system.Firstly, this paper systematically sorts out relevant theories and documents about bank income diversification, performance and risk, especially the ones published after the crisis, in order to grasp the theoretical front and study the trend, as well as to deepen and enrich the theoretical system of bank income diversification, performance and risk.Secondly, studying changes in income structure of major international banks in countries and regions like America and Europe and the influence that the development of non-interest income has on bank performance and risk, provides experience and reference to China’s banking. In the study of the U.S., Germany, the U.K., Japan, Swiss and other five typical countries, it is discovered that the proportion and influence of each nation’s non-interest income differ significantly. A unanimous conclusion can not be drawn about whether non-interest income can improve bank performance and whether it can diversify risk. But in the research, some common characteristics are found, for example in all sample countries, interest income decreasing continuously; fees and commissions being important and steady sources for non-interest income; high volatility of trading income; non-interest business developing in scale. Considering these ten typical international banks, it is found that major banks have a larger proportion of non-interest income that fluctuates greatly; but capital adequacy ratios are low which is risky to banks; major banks have rather low net interest margin; their non-interest income were greatly influenced by the financial crisis, trading revenue is the main reason for deficit and fluctuation in income; the income structure of major banks are closely related to its business model, management tendency and risk appetite.Thirdly, under the new situation of China’s economic and financial reform, this paper tries to thoroughly understand and study our commercial banks business diversification, shift in income structure and future tendency in development, as well as study the conditions and trends of bank performance and risk management. So far, there are mainly two business diversification models for our commercial banks:one adopted by most major commercial banks is the Bank Holding Group and Financial Holding Group model; another is that under the separate operation, separate supervision system, banks and other non-bank financial institutions are cooperating on businesses like bank-trust cooperation, bank-brokerage cooperation, bank-fund cooperation and bank-insurance cooperation. The income of commercial banks still depends heavily on net interest income. Non-interest income doesn’t account for much but it develops rather fast and it shows differences depending on the type and characteristics of the bank. From the standpoint of performance and risk management, commercial banks are improving. The non-interest business still has a lot potential to develop but banks should also prevent and manage risk.Fourthly, this paper first builds the theoretical system and research framework of bank income structure and risk, then builds their empirical model and uses EVIEWS, software R etc. to do empirical analysis.(1)Volatility analysis on commercial banks’ income.(2)Analysis on income volatility based on portfolio theory, finding that from2003to2013, total income volatility of commercial banks decreased. One is due to the decrease in volatility of net interest income. Another is due to the essential zero corariance (all sample banks) or negative covariance(large-scale commercial banks) of net interest income and non-interest income, so that banks’income portfolio can diversify risk.(3)Study the relation between interest income and non-interest income based on portfolio theory. The result shows that the correlation coefficients of net interest income and non-interest income are mostly negative, which has the effect of diversifying risk.(4) Regression analysis on the factors of relation between net interest income and non-interest income.Finding that for all bank samples, non-interest income share doesn’t have significant influence on the correlation coefficient.(5) Study the relation between income diversification, non-interest income and bank performance and risk, using panel data of2003-2013from16listed domestic commercial banks as study objects and by using panel regression model. Estimated results show that the degree of diversification has a positive correlation with bank performance and risk. Improvement of diversification helps improve bank performance, increase risk-adjusted return, lower risk of bank failures. But the proportion of non-interest income has a negative correlation with bank performance and risk. This indicates the double-edged attribute of non-interest income.Finally, based on thorough study and refection on the development of income structure and risk of international and domestic banking, combining empirical analysis and the new situation of China, this paper makes a summary and provides the following implication and references for the smooth transition of income structure and the development of non-interest business of Chinese banking:(1) we should view income diversification and non-interest income rationally, The development of non-interest income and differences in proportion are closely related to each country’s financial system, economic background, business model and so on. We should not measure the development of the banking industry and the degree of competitiveness only by income diversification and non-interest income ratio.(2) While income diversification, the development about trading business should be cautious.(3) The innovation of non-interest business should meet the demand of real entity for the financial service.(4) Income diversification should pay attention to the extension and innovation Based on the foundation of bank’s core functions.(5) Different types of banks should have its diversification adapt to its scale;(6) commercial banks should combine its income transformation to diversification with comprehensive risk management.