The dynamics of operating income in the Norwegian banking sector

Bank revenues have a time variation pattern over the business cycle. Since revenues are a major determinant of bank capital and lending capacity, the time variation may have an impact on the real economy and may potentially amplify the business cycle. It will therefore be useful to understand how bank revenues vary over time, and in particular what are the relationships with key macroeconomic variables. The present paper sets out to investigate these relationships more deeply in the context of the Norwegian banking industry. The banking literature contains only a handful of studies of how bank revenues vary over the business cycle, and they all look exclusively on the net interest margin. The general conclusion has been that the margin tends to increase during recessions and decrease during booms. This paper extends the existing literature by taking the volume effect into account and looking at net interest income, and also by looking at how fee income varies over the cycle. The paper is written in the context of an on-going research programme at Norges Bank Financial Stability, aiming to develop procedures for stress testing the profitability and capital adequacy of the Norwegian banking sector.