The Effect Of Non-interest Income On Risk Of Commercial Banks In China

In the past three decades, the banking industry in developed as well as in developing countries has experienced tremendous changes. The deregulation of the regulatory authorities and increased competition has led commercial banks to expand new activities which generate non-interest income beside their traditional interest activities.At the end of 2012, the average proportion of non-interest income to total operating income is more than 22% in China’s five state-owned commercial banks. The proportion in Bank of China reaching 29.81%, which is the highest among the five banks. Among the national joint-stock commercial banks, the average proportion reached 18%. Merchant bank and Minsheng bank have the highest proportion, reaching 25.5% and 25.17% respectively. Based on the fact that the proportion of non-interest revenues continue to increase, this paper study the impact of increasing non-interest income and the commercial bank risk.First, this paper reviews the domestic and international academic research on bank’s non-interest income. Then, we define the concept of non-interest income in China’s banking industry, tell the difference among non-interest income, intermediary business and off-balance sheet business income, sum up the theoretical basis of commercial banks to carry out non-interest income business. Last, we point out the current situation and the problems of developing non-interest income business in China’s banking industry. In the empirical part, we pick up the financial data from 17 commercial banks during the year 2001 to 2012.Based on the portfolio theory and the panel regression model respectively, we have an empirical analysis about the increasing proportion of non-interest income and bank risk, and comes the conclusion: the increasing proportion of non-interest income of commercial banks will help to reduce bank risk ultimately. But in the initial stage of developing non-interest income business, banks need to pay the cost of the manpower, material and financial resources, and consumers need some time to adapt to the new lines of businesses. So the increasing proportion of non-interest income will not help reducing bank risk immediately. But this duration is not long, with the passage of time, the increasing proportion of non-interest income in commercials banks will ultimately help to reduce the bank risk.Based on the theoretical and empirical analysis of non-interest income in China’s banking industry, this paper summarized the conclusion of the increasing proportion of non-interest income, and give the corresponding policies and recommendations about how to develop the non-interest income businesses.