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This paper investigates risk shifting in commercial banks in the emerging market of Vietnam, where banks fund domestic asset portfolios almost exclusively from deposits and with limited issuance of securities. We investigate the relationship between these banks' income diversification strategies and their overall level of risk during the recent period of deregulation and global financial crisis. Our results show that those commercial banks that have shifted to non-interest income activities in fact face higher levels of risk. This finding is at odds with theories that argue that diversification is a strategy for risk reduction and has broader implications for domestic system stability. The analysis provides a framework for evaluating these issues in other emerging markets. Risk Management (2016) 18, 217–235. doi:10.1057/s41283-016-0008-2; published online 1 December 2016

This study is aimed to examine the impact of income diversification on bank risk in Vietnam before and during the COVID-19 pandemic by studying commercial banks over the period 2012-2020. By employing the fixed effects model (FEM) and general least squares model (FGLS), our main result shows that the higher the level of income diversification, the lower the risk of default. However, the diversification strategy should be conducted based on each source of non-interest income, in particular banks need to limit the increase in direct income from service activities, and reduce service fees to increase other indirect revenues, such as benefiting from transaction size and CASA value. This is different from previous studies. Besides, banks should improve the quality of foreign exchange business, securities investment and increase income from other non-interest activities. We also find that bank's default risk tends to decrease when the COVID-19 pandemic breaks out. However, contrary to our hypothesis, the impact of the COVID-19 pandemic on the relationship between income diversification and default risk of commercial banks in Vietnam has not been confirmed.

Purpose: Financial banking intermediaries are sensitive to changes in market interest rates. The volatility of market interest rates affects the level of bank net interest income and determines the bank interest rate policy. Banks are actively managing structural interest rate risks to mitigate the negative effects of changes in market interest rates. The post-crisis period is characterised by unconventional monetary policy, and one of the basic objectives of the monetary instrument is a negative interest rate policy. This paper researches the effects on the bank net interest income structure with an impact on bank performance indicators. The basic research hypothesis is that during the financial crisis and a negative interest rate policy, the movement of bank interest income does not converge compared to a bank interest expense.Methodology: According to the characteristics of the dataset, which includes 32 listed banks from Great Britain, Switzerland and the European Union for the period 2002-2019, panel data analysis is applied. To analyse the effect of the interest rate level on total interest income and total interest expense, we formed two models. Fixed-effects models were used for parameter estimation. Results: A bank interest expense is more sensitive to unconventional macroeconomic policy than bank interest income. Conclusion: The traditional interest earning customer related business can enable banks to stabilise the bank performance indicator during market disruption.

In the future, when the process of economic integration in the banking sector is more powerful, and competitive, diversifying revenue is an inevitable and objective trend to help the banks increase profits, minimize risks and improve their competitive position in the system. The research is on the relationship between revenue diversification, risk and bank performance using data from audited financial statements and annual reports of 26 commercial banks listed and unlisted in Vietnam during the period 2010–2018. The research method uses Generalized Method of Moment (GMM) modeling techniques to solve endogenous problems, variance and autocorrelation in the research model. Research results show that diversification negatively impacts profitability and the higher the diversification, the higher the risk of commercial banks. However, the more diversified listed banks, the more increased the bank’s stability. The banks show the weakness and lack of experience of the banking system in developing a reasonable profit transformation model. The revenue diversification of banks is currently passive and moves slowly. Interest income is still the motivation of bank development, boosting profit growth. Growth, as well as the contribution from service activities, is not commensurate with potentials; although there are many positive points, they are not enough to cover risks from net interest income activities.

[...]to make the investment Sharī'ah compliant, the investor needs to purge his share of the interest income that has accrued to the company to the extent of his investment in the shares of the company.According to this method, the purging amount is calculated by dividing the total prohibited income by the total number of outstanding shares of the company and then multiplying the resulting figure by the number of shares owned by the investor.[...]Purging Amount = (2,000/300)·(0) = (6.67)·(0) = USD 0 million It means that, since the investor does not own the shares at the end of the year, there will be no purging liability at all on the investor who had held the shares when the interest was received by the company. c.Purging Calculation under the Modified AAOIFI Purging Method Under the modified AAOIFI purging method, the investor needs to purge the interest income for the period during which the shares were held by him.Despite that, using the dividendbased method, the investor is required to purge only an amount of USD 0.48 million, i.e., less than 1% of the interest received by the company on his account.[...]this is restricted to the case where the company distributes a dividend. b. If the company does not declare a dividend, or if it declares a dividend but the investor had already sold his shares earlier, the investor is not required to purge any amount though the interest was earned while he held the shares. c. Under the AAOIFI method, the investor is required to purge the entire interest amount of USD 66.7 million received by the company on behalf of the shares of the investor, irrespective of whether or not the company declares a dividend. d. However, this liability becomes his responsibility only if he continued to hold the shares until the end of the accounting period.

The Economist explains why interest rate predictions are so easy to get wrong.

The results of the banking sector are shaped primarily by commissions and net interest income. Net interest income is determined by the difference between the profitability of bank assets and liabilities. In the case when a different method is used to determine interest for each side of the balance sheet, there occurs a basis risk that may lead to the deterioration in the net interest income of the sector. This is the situation in the Polish banking sector, which is characterized by the presence of variable interest rates for long-term assets and fixed interest rates for short-term liabilities. The study aims to verify the following thesis: in an environment of falling interest rates we can observe the deterioration in net interest income of the banking sector, as a result of the materialization of the basis risk. The authors of the article state that the source of the basis risk is the mismatch between the reference rate used to define the interest flow of loans and the actual cost of financing the balance through term deposits collected from non-financial entities.

Administrative income tax data indicate that U.S. top income and wealth shares are both substantial and larger than shares observed in household surveys. However, these estimates are sensitive to the unit of analysis, the income concept measured in tax records, and, in the case of wealth, to assumptions about the correlation between income and wealth. We constrain a household survey--the Survey of Consumer Finances--to be conceptually comparable to tax records and are able to reconcile the much of the difference between the survey and administrative estimates. Wealth estimates from administrative income tax data are sensitive to model parameters.

This paper assesses potential diversification benefits in the U.S. banking industry from the steady shift toward activities that generate fee income, trading revenue, and other types of noninterest income. In the aggregate, declining volatility of net operating revenue reflects reduced volatility of net interest income, not diversification benefits from noninterest income, which is quite volatile and increasingly correlated with net interest income. At the bank level, greater reliance on noninterest income, particularly trading revenue, is associated with lower risk-adjusted profits and higher risk. This suggests few obvious diversification benefits from the ongoing shift toward noninterest income.

A quantitative investigation of financial intermediation in the United States over the past 130 years yields the following results: (i) the finance industry's share of gross domestic product (GDP) is high in the 1920s, low in the 1960s, and high again after 1980; (ii) most of these variations can be explained by corresponding changes in the quantity of intermediated assets (equity, household and corporate debt, liquidity); (iii) intermediation has constant returns to scale and an annual cost of 1.5-2 percent of intermediated assets; (iv) secular changes in the characteristics of firms and households are quantitatively important.