A Portfolio View of Banking with Interest and Noninterest Activities

This paper uses a portfolio framework to evaluate the impact of increased noninterest income on equity market measures of return and risk of U.S. bank holding companies from 1997 to 2004. The results indicate that the banks most reliant on activities that generate noninterest income do not earn higher average equity returns, but are much more risky as measured by return volatility (both total and idiosyncratic) and market betas. This suggests that the pervasive shift toward noninterest income has not improved the risk/return outcomes of U.S. banks in recent years.