Banks' Non-Interest Income and Systemic Risk Markus K. Brunnermeier, Gang Dong, and Darius Palia January 31, 2012 Abstract Th
Banks’ Non-Interest Income and Systemic Risk Markus K. Brunnermeier,a Gang Dong,b and Darius Paliab January 31, 2012 Abstract This paper documents that banks with higher non-interest income (noncore activities like investment banking, venture capital and trading activities) have a higher contribution to systemic risk than traditional banking (deposit taking and lending). After decomposing total non-interest income into two components, trading income and investment banking and venture capital income, we find that both components are roughly equally related to systemic risk. These results are robust to endogeneity concerns when we use a difference-in-difference approach with the Lehman bankruptcy proxying for an exogenous shock. We also find that banks with higher trading income one-year prior to the recession earned lower returns during the recession period. No such significant effect was found for investment banking and venture capital income. aPrinceton University, NBER, CEPR, CESifo, and bRutgers Business School, respectively. We thank Linda Allen, Turan Bali, Ivan Brick, Steve Brown, Doug Diamond, Robert Engle, Kose John, Andreas Lehnert (discussant), Thomas Nitschka (discussant), Lasse Pedersen, George Pennacchi (discussant), Thomas Philippon (discussant), Matt Richardson, Anthony Saunders, Anjan Thakor, Loriana Pelizzon (discussant), Andrei Shleifer, Rene Stulz, Rob Vishny, and seminar participants at 2012 American Finance Association Meetings, 2011 CEPR/EBC/HEC/RofF/NYSE/Euronext Conference on Financial Intermediation and the Real Economy, 2011 CREDIT Conference in Stability and Risk Control in Banking, Insurance and Financial Markets, 2011 European Economic Association Meetings, 2011 NBER Corporate Finance and Risks of Financial Institutions Meetings, 2011 FDIC Bank Research Conference, and seminars at Baruch, Fordham, Fed Board of Governors, NYU, Rutgers, SMU, and Washington University in St.
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