Income structure, profitability and risk in the European banking sector: The impact of the crisis

• We analyse whether the effect of the income structure on the risk and profitability of European banks has changed as a result of the crisis.
• We also analyse whether the effect varies according to banks’ specialisation in a particular type of banking business.
• Our findings show that an increase in the share of non-interest income has a negative impact on profitability, although the effect was only significant during the crisis.
• An increase in the share of non-interest income was found to increase risk, although the effect diminished with the crisis.
• Results suggest that market power has beneficial effects on financial stability.

This study sets out to analyse whether the effect of the income structure on the risk and profitability of European banks has changed as a result of the crisis and if it varies according to banks’ specialisation in a particular type of banking business. To do so, it estimates the income structure over the period 2002–2012 using data for a panel of European banks. The study also examines if there are differences between investment-oriented banks and banks specialising in financial intermediation in terms of the effect of income structure on risk and profitability. Our findings show that an increase in the share of non-interest income has a negative impact on profitability, although the effect was only significant during the crisis. Nevertheless, analysing the impact on each type of banking business separately, the effect on retail banks is negative and significant, but not significant in the case of banks whose business is more diversified. An increase in the share of non-interest income was found to increase risk, although the effect diminished with the crisis. In general, the results suggest that market power has beneficial effects on financial stability.