Income diversification in theGerman banking industry

In the last few years it has been possible to observe decreasing interest margins forGerman universal banks. At the same time, institutions increasingly moved partof their business from interest to fee-earning activities. This study analyzes thedeterminants of non-interest income and its impact on financial performance andthe risk profile of German banks between 1995 and 2007. We find empirical evidencethat for all German universal banks risk-adjusted returns on equity and total assetsare positively affected by higher fee income activities. Additionally, for commercialbanks we show that a strong engagement in fee-generating activities goes alongwith higher risk. In order to analyze possible cross-subsidization effects betweeninterest and fee business we also examine how banks’ expansion in fee-based serviceshas affected their interest margin. For savings and commercial banks we find thatinstitutions with a strong focus on fee business charge lower interest margins whencredit risk is controlled.[...] Ramona Busch, Thomas Kick