Non-interest income and bank risk: The role of financial structure

We study the influence of financial structure on banks' revenue choices, profitability and risk using an extensive global sample of commercial banks from 126 countries. We find that banks in countries with a more market-based financial structure engage in a higher proportion of non-interest income-based activities. Both non-interest income and a more market-based financial structure are positively associated with bank profitability, but neither is risk-increasing. Instead, there is some evidence suggesting they are risk-decreasing. Furthermore, we demonstrate that, in countries with lower regulatory restrictions, non-interest income increases both bank profits and risk adjusted profits. Combining low regulatory restrictions with a more market-based financial system, increased non-interest income reduces revenue volatility and loan losses, while increasing distance to default (Z-score).