Bank Activity and Funding Strategies: The Impact on Risk and Returns

66 Pages Posted: 20 Apr 2016

See all articles by Asli Demirgüç-Kunt

Asli Demirgüç-Kunt

World Bank

Harry Huizinga

Tilburg University - Center for Economic Research (CentER); Centre for Economic Policy Research (CEPR)

Date Written: February 1, 2009

Abstract

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.

Keywords: Banks & Banking Reform, Debt Markets, Emerging Markets, Access to Finance

Suggested Citation

Demirgüç-Kunt, Asli and Huizinga, Harry, Bank Activity and Funding Strategies: The Impact on Risk and Returns (February 1, 2009). World Bank Policy Research Working Paper No. 4837, Available at SSRN: https://ssrn.com/abstract=1346244

Asli Demirgüç-Kunt (Contact Author)

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Harry Huizinga

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2623 (Phone)
+31 13 466 3042 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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