Study On The Endogeneity Of Noninterest Income Of Commercial Banks

The noninterest income banks generate from their off-balance-sheet activities contributes greatly to the volatility of their operating revenues. We apply a modified Hausman procedure based on higher moments instruments and revisit this phenomenon to establish that the share of noninterest income (snonin) is actually endogenous to banks returns. ARCH-M estimations corroborate the idea that banks have gradually adapted to their new business lines, with an adjustment process. However, the banks risk premium associated to OBS activities has continuously increased since that date. Comparison of noninterest income and interest income impact on bank earnings:non interest income to be able to play the effect of risk diversification; noninterest income and interest income have high procyclicality and synchronization; the average annual compound growth rate of interest income is higher than the average annual compound growth rate of noninterest income, but the commercial banks pay more and more attention on OBS activity. The contribution of noninterest income to commercial bank profit is growing with each passing day; the volatility of interest income is higher than the volatility of noninterest income. The quo status of China’s commercial banks is still the interest income.The central element of commercial bank operation is risk. Therefore, how to control risk more reasonable and measure it more scientific of risk should be placed in an important strategic position to consider. Through this study, we found that the method to measure the risk of commercial bank is the traditional VaR model, however itself is dependent on the commercial bank return volatility. Besides, GMM estimation found that the market risk premium has little effect on the ROA. This also indicates that the use of only considering the systemic risk measures to measure bank earnings is not perfect. Rate of return volatility model is different to market risk premium models that consider only systematic risk, it also take the special risk pricing into account. Although the return fluctuation in the measure of stock or non diversified portfolio will overestimate the risk. But, because of the influence of particle fluctuation of special risks, the return fluctuation could avoid the influence of fat tail, compared with the market risk premium, the return fluctuation is more suitable to measure the risk of the bank. At present, commercial banks are actively expanding non interest income business, but we should pay more attention to the implementation of differentiation strategy and strive to ensure the dynamic balance between the development of non interest income and interest income. Secondly, in order to ensure the healthy and stable development of the business, formulate scientific and reasonable regulation of noninterest income business strategy, we could consider the safety combined or science hedge strategies etc. Because of high risk of bank is actively engaged in non interest income, so the key regulatory authorities in non interest business supervision should be placed in the low capital adequacy ratio and high credit risk banks. In a word, we should turn the traditional VaR model gradually to the rate of return volatility model in the measure of risk of commercial banks and pay more attention to the structure optimization of commercial bank interest income and noninterest income.