Stress testing French banks' income subcomponents

Using a broad dataset of individual consolidated data of French banks over the period 1993-2007, we seek to evaluate the sensitivity to adverse macroeconomic scenarios of the three main sources of banking income, namely interest margins, fees and commissions, and trading income. First, we show that the determinants of banking income subcomponents are highly specific: whereas interest rates spread plays a significant role in determining net interest income, stock market measures are significant determinants of trading income. GDP growth impacts significantly on fees and commissions. Second, our macroeconomic stress testing exercises tend to show that fees and commission and to a lesser extent trading incomes are much more sensitive to some adverse macroeconomic shocks than interest income. This could support the view that income diversification is associated with higher banking revenue resilience.