Stress testing French banks' income subcomponents *

Transcription

1 Sress esng Frenc banks' ncome subcomponens * J. Coffne, S. Ln and C. Marn 22 February 2009 Absrac Usng a broad daase of ndvdual consoldaed daa of Frenc banks over e perod , we seek o evaluae e sensvy o adverse macroeconomc scenaros of e ree man sources of bankng ncome, namely neres margns, fees and commssons, and radng ncome. Frs, we sow a e deermnans of bankng ncome are gly specfc: wereas neres raes spread plays a sgnfcan role n deermnng ne neres ncome, sock marke measures are sgnfcan deermnans of radng ncome. GDP grow mpacs sgnfcanly on fees and commssons. Second, our macroeconomc sress esng exercses end o sow a fees and commsson and o a lesser exen radng ncomes are muc more sensve o adverse macroeconomc socks an neres ncome. Ts could suppor e vew a ncome dversfcaon s assocaed w ger bankng revenue reslence. JEL classfcaon: C23; G21; L2. Keywords: bankng ncome, neres margns, fees and commssons, radng ncome, dynamc panel esmaon. * Many anks o Jézabel Couppey-Soubeyran, Ensse Karroub, Guy Lévy-Rueff, Adran Pop, Murel Tesse for er valuable advces on a former verson of a projec. We also would lke o ank our colleagues from e DG Economcs wo provded us w e varous scenaros foundng e macroeconomc sress ess. All errors reman ours. Te opnons expressed are no necessarly ose of e Banque de France. Banque de France, Bankng Sudes Dvson, 115 rue Réaumur PARIS. Emal: [email protected]. Tel: Banque de France, Bankng Sudes Dvson, 115 rue Réaumur PARIS. Emal: [email protected]. Tel: Banque de France. Emal: [email protected].

2 1. Inroducon Snce e early nnees, ecnologcal nnovaon and fnancal lberalsaon rggered mporan canges n e bankng sysem, ncludng ncreased compeon, concenraon and resrucurng. Tese canges also overurned e radonal vson of e bankng secor. A noceable effec s e dsnermedaon process accompaned by an ncrease n e dversy of savngs allocaon producs and e emergence of non-bank fnancal acors. As e ECB (2000) pons ou, markes can now perform asks wc were prevously reserved for banks. Owng o e ncepon of e euro and e fnancal lberalsaon, money and capal markes ave become deeper and more lqud, explanng also wy banks are more marke-orened an ey were before. Banks ave reaced o s cangng envronmen by mplemenng proacve sraeges o reman compeve n er radonal acves of lendng bu ey ave also engaged n new busnesses, suc as fees and commssons and radng acves, o dversfy er ncome sources and expand bo er balance sees and er revenues. Idenfyng e facors a drve banks ncome s mporan o oban a good undersandng of sources of rsk n e bankng secor. Moreover, as e breakdown of e varous subcomponens of bankng ncome as parcularly canged over e recen years, modellng e lnks beween e macroeconomc and marke envronmen on e one and and e ncome subcomponens on e oer and s parcularly useful o es e reslence of e bankng sysem. Indeed, banks wose revenues rely on specfc ncome sources suc as radng ncome, for nsance, are muc more lkely o suffer from severe socks semmng from e fnancal markes, raer an banks wose revenues come manly from neres ncome. Ts srucural dversfcaon of bankng ncome s of parcular neres for supervsory auores. More specfcally, sudyng e mpac of varous socks on bankng ncome subcomponens s lkely o sed new lg on e ssue weer ncome dversfcaon s a source of sably. A useful ool for assessng e reslence of bankng ncome subcomponens o macroeconomc and fnancal socks reles on e sress es meodology, wc as receved a grea audence n e recen years. Sress es exercses prove o be of parcular neres, as ey make possble o sudy e effecs of varous macroeconomc scenaros on varables of neres, suc as bankng ncome subcomponens. 2

3 Te presen paper ams a denfyng e deermnans of e ree man subcomponens of bankng ncome.e. ne neres margns, fees and commssons and radng ncome, for a large daase of Frenc banks over e perod We also propose o assess Frenc banks ncome srucure reslence o macroeconomc and fnancal socks usng e sress ess meodology. Our resuls are e followng. Frs, we sow a e deermnans of bankng ncome are gly specfc: wereas neres raes spread plays a sgnfcan role n deermnng ne neres ncome, sock marke measures are sgnfcan deermnans of radng ncome. GDP grow mpacs sgnfcanly on fees and commssons. Second, our macroeconomc sress esng exercses end o sow a fees and commsson and o a lesser exen radng ncomes are muc more sensve o adverse macroeconomc socks an neres ncome. Ts could suppor e vew a ncome dversfcaon s assocaed w ger bankng revenue reslence. Te sudy s srucured as follows. Secon 2 revews e leraure on recen banks ncome srucure developmens and er mpac on profably and banks' rsk profle. Secon 3 presens e daa and e model esmaed n e paper. In e secon 4, we presen e resuls of e esmaons. Secon 5 apples ose resuls o sress ess exercses. Fnally, secon 6 concludes. 2. A leraure revew on banks' ncome sources Te ncreased dversfcaon of bankng ncome sources s a srucural rend observed over several years. Moreover, regardng e process of dsnermedaon, e leraure consders e ncome sources dversfcaon as e subsuon of neres ncome by non-neres ncome. Ts defnon mg be no precse enoug as many marke-orened banks ncome sources are essenally based on non-neres componens suc as commssons and fees or revenues from radng acves, wose deermnans mg fundamenally dffer. In e same me, one callengng ssue s o defne e dfferen ncome subcomponens were counry- or even bank-specfc facors (accounng sandards) make comparsons que dffcul. Ts observaon s parcularly rue for e dsncon beween neres and nonneres ncome. Te dsnermedaon process makes e dsncon que elusve: for 3

4 nsance, e neres raes play an mporan role n dfferen ncome subcomponens (e nermedaon margn n real acves, radng profs on fxed ncome secures, ec.). Fnally, e man concern for bankng supervsors bend e ncome source dversfcaon s e defnon of ncome subcomponens and er mpac on fnancal sably and more precsely, ow e cangng ncome srucure may affec bankng rsk profle. Consderng e effecs of ncome dversfcaon on banks' profably, e resuls of exsng leraure are que conradcory and largely depend on e perod analyzed and daase used. Davs and Tuor (2000) fnd no evdence of a posve relaonsp beween acves generang non-neres ncome and profably. Tey only observe a posve correlaon beween non- neres ncome and e cos-o-ncome rao. De Vncenzo and Quaglarello (2005) sow a posve correlaon beween non-neres ncome and e rao of ne operang ncome o oal asses for Ialan banks. Sro (2004) concludes a dversfcaon benefs are lkely o be small. Banks' sraegc coces end o offse ese gans as rsks ncrease w leverage, corporae lendng and dependency on fnancal marke evoluons. A s sage, a frs concluson o be drawn s a e assessmen of a relaonsp beween banks profably and e ncrease n non-neres ncome s lkely o be () subjec o e defnon of neres versus non-neres ncome and () deeply nerrelaed w e rsk assessmen of e bankng acvy under consderaon. Bo cos and rsk effecs are lkely o be sgnfcan for banks' earnng volaly and rsk profle. On s ssue, emprcal resuls also dverge. Sm e al. (2003) confrm a negave correlaon beween neres ncome and non-neres ncome. Tey observe a profs are more sable roug ncome dversfcaon. By conras Sro (2004) fnds a posve correlaon on US banks beween 1984 and I s en dffcul o conclude a nonneres ncome s more volale an neres revenues. Te ECB (2000) repor noes dfferences among European counres and sows a some ypes of accounng sandards - especally as regards provsonng may exacerbae e neres ncome volaly. Alernavely, some sudes brng o e fore e volaly of non-neres ncome componens. ECB (2000) pons ou a profs from radng acves (fnancal operaons n secures, foregn excanges and dervaves) are e mos volale. By conras, fees and commssons appear o be e mos sable componen of e non-neres ncome. Ts las observaon s confrmed by several sudes on US banks. For nsance, Saunders and Walers (1994) and 4

5 Kwan and Laderman (1999) fnd a fees and commssons from non-bank acves (e.g. nsurance) provded by banks sablze e profably w a sgnfcan decrease of e cos of rsk, relavely o radng acves. Mos sudes lookng a e dversfcaon effecs on bank's rsk profle, suc as Sro (2006), conclude a a sgnfcan relance on commssons and fees may ncrease bank's dosyncrac rsk. ECB (2000) and Sm e al. (2003) dscuss s relance wn e conex of operaonal, repuaonal or sraegc rsk. As ECB (2000) pons ou, e dversfcaon of ncome sources (by produc and by geograpcal area) as o go and n and w ncreased and more complex nernal conrols. More recenly, Lepe e al. (2006) fnd a banks w ger commsson- and fee-based acves may ave a ger rsk profle by underprcng er loans. Banks generally adop s ype of sraegy o capure er clens and en sell em complemenary non-neres based producs, suc as lfe nsurance. More generally, bank supervsors are concerned abou e poenal effec of e dversfcaon of ncome sources on e sably of e bankng and fnancal sysem. Te leraure on s relaed opc s que recen and mos of e researc papers deal w sysemc rsk. Te resuls are somewa couner-nuve as several sudes conclude a ncome dversfcaon ends o rase sysemc rsk. Beale e al. (2007) and Sro (2006) measure banks' marke bea 5 for European and US banks respecvely and fnd a busnesses generang non-neres ncome are more sensve o marke movemens or economc socks. Usng e al-bea 6 as a sysemc measure, ECB (2007) reveals a sze and non-neres acves conrbue o ncrease banks rsk profle, wereas e level of capal and e neres ncome reduce. Papers nvesgang e specfc drvers of ncome subcomponens are relavely scarce. Followng Pan (2003) for e major UK banks, Lemann and Manz (2006) and Rouaba (2006) deal w s ssue respecvely for Swss banks and for cred nsuons eadquarered n Luxembourg. Tey fnd sascally sgnfcan relaonsps beween varous macroeconomc varables on e one and and neres and non-neres earnngs on e oer and. Ter fnd some common feaures as regards radng ncome, wc are lkely o ncrease w sock marke reurn and decrease w sor-erm neres raes. Surprsngly, 5 Bea s a measure of e sysemac rsk of an asse. I s e key parameer of e CAPM (Capal Asse Prcng Model), wc measures e sensvy of e reurn of a specfc asse o e reurn of e marke. 6 Tal-bea s e condonal probably a a negave sock reurn s ger an a gven resold. 5

6 Swss banks radng ncome s lkely o decrease w e volaly of e sock marke. As regards ncome semmng from commssons and fees, may ncrease w sock marke reurn n bo counres, bu decrease w s volaly n Swzerland. Fnally, as regards e ne neres ncome, ese auors fnd a posve mpac of e spread beween long-erm and sor-erm neres rae n Swzerland, and a negave effec of e sor-erm fnancng condons n Luxemburg. Tese papers are also orgnal n a ey evaluae e mpac of exernal socks on banks' ncome. Tey conclude a e socks on profs are relavely modes n erms of excess capal. In s regard, a profable and well capalzed bankng secor s que reslen and able o absorb losses from global marke socks wou jeopardsng e fnancal sysem. Assessng e mpac of e macroeconomc envronmen on e bankng sysem as become an ncreasngly mporan ssue on e researc agenda, n parcular wn cenral banks. Macroeconomc sress ess ave also been ncluded n e Inernaonal Moneary Fund s Fnancal Secor Assessmen Program (FSAP). Surveys on fnancal sress esng are provded by Sorge (2004) and Jones, Hlbers and Slack (2004). Sress ess can be dvded no wo major caegores: n a boom up approac, banks emselves carry ou ndvdual sress ess for gven scenaros and repor em o regulaors or cenral banks for aggregaon. By conras, n a op down approac, e analyss s carred ou a a cenralzed level and reles on daa avalable o regulaors or cenral banks. One approac, adoped by Vrolanen (2004), s o posulae corporae defauls as a funcon of macroeconomc nfluencng facors, modelled as a prob or log process. Alernavely, Dremann (2005) uses equy daa and a Meron model o derve defaul probables of frms. Based on predced corporae secor defaul raes, s approac ypcally proceeds o assess e mpac of seleced scenaros on bank cred porfolos. Unforunaely, s no sragforward o lnk corporae secor defaul raes o ndvdual bank cred porfolos, n parcular f dealed daa on ndvdual bank cred porfolos are mssng. Terefore, a second approac, wc we follow n s paper, s o esmae e mpac of macroeconomc evens on banks drecly. A number of sudes explore loan loss provsons, non-performng loans or profably measures as a funcon of macroeconomc varables. Examples n an aggregae me seres conex nclude Hoggar, Sorensen and Zccno (2005), Kalra and Scecer (2002) and Delgado and Saurna (2004). Tere exs also a few panel sudes for ndvdual counres as e.g. Salas and Saurna (2002), Pesola (2001) and Pan (2003). In a relaed paper, Elsnger, Lear and Summer (2002) explore e role of muual cred exposures n e Ausran bankng sysem, wc may 6

7 renforce e mpac of an nal sock. Te auors conclude a nerbank lnkages play a mnor role. Te approac aken n e presen paper s mos closely relaed o e panel sudy of Pan (2003), oug we use a muc larger daa se wc ncludes large nernaonal banks, bu also many regonal, prvae and oer banks. A key advanage of usng ndvdual bank daa s e possbly o conrol for ndvdual bank caracerscs affecng profably. Our paper follows e same approac as a of Lemann and Manz (2006) and Rouaba (2006), focusng raer on e subcomponens of Frenc banks ncome. Our goal s us o assess e relave mporance of e dfferen socks on eac componen. Furermore, n addon o ose papers, we run some compreensve sress es exercses based on a macroeconomerc model, raer an a crude sensvy analyss. 3. Daa and meodology 3.1 Descrpon of e daa Te endogenous varables: e bankng ncome subcomponens Our daase 7 consss of consoldaed accounng daa exraced from e year-end bankng sascs colleced by e General Secreara of e Bankng Commsson. Our sample spans e perod from 1993 o Moreover, our daabase encompasses e wole Frenc bankng secor. Oer avalable daase (a are no based on supervsory daa) suffer from a narrow me-wndow as concerns fees and commssons and radng ncome and few observaons n e cross-secon dmenson (only 30 banks n 2007 n Bankscope, for nsance). By conras, our consoldaed daabase ncludes more an 200 ndvduals (banks). I sould be noed as well a ncome from banks nernaonal busness, asse managemen or nsurance acves, are no capured n s sudy, aloug s s an mporan source of dversfcaon n bankng (especally n counres lke France). However, subsdares of e same bankng group are recorded n an ndrec way, from parcpang neress, capal sares or sock dvdends as subcomponens of non-neres ncome. In any case, s daa lmaon as o be aken no consderaon wen nerpreng e emprcal resuls. 7 Te daabase from wc we collec e daa s usually known as e Baf daabase. Frenc banks' ncome componens are based eer on unconsoldaed daa or on consoldaed daa. In e presen sudy, we make use of consoldaed daa. 7

8 Te ree man componens of oal bankng ncome (e ne bankng ncome) are neres ncome, fees and commssons and radng ncome. In e perod , ese componens accoun for abou 90% of oal ncome, 45%, 25% and 20% respecvely. Te fgure 1 below sows e developmen n ose varous ncome subcomponens as a sare of oal bankng ncome. I s easly remarkable a ne neres ncome s on a downwards rend, as commssons and fees ncome and radng ncome end o ncrease bu sow a ger volaly. Fgure 1: breakdown of Frenc banks ncome ( ) 100% 80% 60% 40% 20% 0% Source: SGCB Ne neres ncome Tradng ncome Commssons and fees Oer non-neres ncomes Our endogenous varables are e raos of bankng ncome componens o e oal bankng asses. Te followng fgure 2 sows e evoluon of ose varables (aggregaed). Once agan, e general rend s a e neres ncome decreases from 1993 o 2000, a leas, and en flucuaes. Oer ncomes end o ncrease bu ey appear raer volale. Fgure 2: developmens n ncome subcomponens 1,8% 1,6% 1,4% 1,2% 1,0% 0,8% 0,6% 0,4% 0,2% 0,0% ne neres ncome commssons and fees radng ncome 8

9 Te followng able 1 dsplays descrpve sascs abou endogenous varables: er mean and er coeffcen of varaon. Frsly, banks are classfed accordng o er jurdcal form: we dsngus commercal banks, muual and cooperave banks, and fnancal frms. Secondly, we dfferenae banks accordng er balance-see s sze: banks a are n e 75%-100% percenle regon of e larges balance-see are classfed as large banks, and banks n e boom 25% percenle regon are classfed as small banks. One fndng s a e mos volale ncome componen seems o come from radng acves: e coeffcen of varaon of radng ncome of eac bank s sgnfcanly ger an a of e oer componens. I s also observed a muual and cooperave banks ave e mos sable ncome as ey ave e smalles coeffcens of varaon among all bank caegores. Table 1: descrpve sascs of endogenous daa Indvdual consoldaed daa ( ) Ineres Tradng Commssons/asses ncome/asses ncome/asses All banks Average 2,1% 3,5% 0,3% Coeffcen of Varaon 1,1 3,8 11,3 Commercal banks Average 2,0% 2,9% 0,4% Coeffcen of Varaon 1,4 2,5 4,0 Muual and cooperave Average 2,2% 1,2% 0,1% banks Coeffcen of Varaon 0,4 0,4 5,0 Fnancal frms Average 2,2% 2,2% 0,1% Coeffcen of Varaon 1,1 4,7 13,9 Large banks Average 1,9% 0,7% 0,3% Coeffcen of Varaon 1,0 0,9 2,3 Average banks Average 2,2% 1,9% 0,1% Coeffcen of Varaon 0,8 3,4 5,9 Small banks Average 2,1% 16,1% 1,2% Coeffcen of Varaon 2,0 1,9 8, Explanaory varables: macroeconomc and fnancal varables We use e followng common explanaory varables for e ree subcomponens of bankng revenue: - GDP grow s defned as e year-on-year cange n e real GDP n volume exraced from e OECD daabase. Ts varable s able o capure e relaonsp beween bank revenues and e busness cycle (Aanasoglou e al., 2008). Bankng 9

10 ncome mg be procyclcal: durng economc booms, demand for cred and sock marke ransacons could be srengened subsanally. Nevereless, s raer dffcul o guess wc of e ree componens s lkely o be e mos nfluenced by e busness cycle; - Spread s e dfference beween 10-year Treasury bonds neres rae and 3- mon Eurbor rae. Te sor-erm neres rae s e average 3-mon Eurbor rae over one year semmng from e IMF daabase. A rse n sor-erm neres rae s expeced o reduce e ne neres margn, snce suc an ncrease, wc makes e sor-erm ssuance sor-erm lables more expensve, s ypcally accompaned by a less an proporonal ncrease n long-erm neres rae. Te long-erm rae s e yeld on 10- year Treasury bonds (Oblgaon Assmlables du Trésor 10 ans). Le us recall a e radonal neres-dfferenal busness of banks rely on er ably o earn ger neres raes on er asses an ey ave o pay on er lables, and mg depend on e evoluon of neres raes. In a respec, gven a banks ssue sor-erm lables o fnance long erm loans, we expec a e long-erm neres rae as a posve mpac on ne neres ncome. Smlarly o sor-erm neres rae, s raer dffcul o ancpae e effec of e long-erm neres rae on non-neres ncome. Overall, we expec a posve mpac of e neres rae spread on bankng ncome subcomponens, especally e ne neres ncome; - SBF250 s e sock marke average reurn semmng from an nernal Banque de France s daabase. Te mpac of e evoluon of sock marke prces on radng ncome seems raer obvous, n conras w e oer subcomponens for wc no nuon can be pu n evdence. Te able 2 below summares e average values and coeffcen of varaon for ese varables n e perod of Table 2: descrpve sascs on macroeconomc and fnancal varables Annual daa Coeffcen of Average ( ) varaon GDP grow 2,01% 0,58 Spread 1,54% 0,43 SBF250 reurn 10,5% 2,06 10

11 3.1.3 Te conrol varables: bankng varables Te ndvdual caracerscs of banks (for e.g. banks capal, er degree of cred rsk and ec.) ave drec nfluence on e resuls. Consequenly, we ave o ake no accoun some addonal varables as conrols: - Expendure s e rao of expendure o oal asses. I s expeced o be negavely relaed o profably, snce mproved managemen of ese expenses wll ncrease effcency and erefore rase profs. Bu e effec on e varous subcomponens s no a nuve; - Capal s defned as e rao of equy o oal asses. As s varable denoes more opporunes for banks, s mpac s lkely o be posve; - Rsk s defned as e rao of loan loss provsons o oal loans. Teory suggess a ncreased exposure o rsk s normally assocaed w lower revenues. Banks could, nevereless, mprove revenues by screenng and monorng cred rsk, mprovng e forecass of fuure levels of rsk. Te sgn of e mpac on revenues s us ambguous; - Marke sare s a varable capurng e sare of eac bank n eac of e ree markes (ne neres ncome, fees and commssons, radng ncome), defned as e sare of ndvdual bank s cred o aggregaed bankng sysem s cred for ncome revenue and fees and commssons, and as e sare of ndvdual bank s radng porfolo o aggregaed bankng sysem s radng porfolo for radng acves. As marke sare ncreases e marke power of a specfc bank, e mpac of s varable s expeced o be posve. Te able 3 provdes some descrpve sascs for e bankng varables and able 4 recapulaes e expeced effecs of explanaory varables on e varous ncome subcomponens. 11

12 Table 3: descrpve sascs of bankng varables Indvdual consoldaed daa ( ) Capal/asses Expendure/asses rsk All banks Commercal banks Marke sare (radng acves) Marke sare (cred acves) Average 16,8% 4,9% 0,6% 0,5% 0,5% Coeffcen of Varaon 9,4 2,7 15,4 4,3 3,5 Average 12,3% 4,1% 0,5% 0,6% 0,7% Coeffcen of Varaon 5,8 1,5 15,5 3,8 3,0 Muual and Average 8,2% 2,3% 0,0% 0,5% 0,4% cooperave banks Coeffcen of Varaon 0,6 0,4 6,3 4,2 3,3 Fnancal frms Large banks Average banks Small banks Average 18,2% 3,7% 0,9% 0,4% 0,3% Coeffcen of Varaon 2,7 2,6 8,5 4,7 3,8 Average 5,7% 2,0% 0,0% 0,6% 1,0% Coeffcen of Varaon 0,7 0,6 6,2 3,5 2,3 Average 11,2% 3,2% 0,1% 0,4% 0,2% Coeffcen of Varaon 1,2 1,9 7,7 4,7 4,7 Average 63,6% 17,9% 4,0% 0,3% 0,2% Coeffcen of Varaon 6,6 1,7 6,4 6,1 5,0 Table 4: Varable specfcaons for esmaons Varable Expeced effec on Ineres ncome Fees and commssons Tradng ncome GDP grow Spread +?? SBF250?? + Expendure??? Capal Rsk??? Marke sare Meodology We compue panel regressons on e se of macroeconomc and bank-specfc varables. In parcular, n e regresson relaed o one ncome componen, besdes e frs lagged dependen varable ( π ), we add e frs lag of oer ncome componens ( π, 1 exogenous varables n order o ake no accoun e possble dependence among ncome componens (e.g. porfolo reallocaon). Te equaon o be esmaed looks lke:, 1 ) as 12

13 13 k k k j j j Z X,, 1, 1, 1, ε θ β π α π φ π = (1) : - ncome componen (neres ncome, commssons or radng ncome) : bank : a e me -: ncome componens besdes e - componen X j : j- macroeconomc varable Z k : k- bank-specfc varable We use e Arellano-Bond (Arellano and Bond, 1991) wo sep esmaor for our dynamc panel-daa model and robus opon o repor sandard error, under STATA usng command xdpd. We use wo ypes of nsrumens for our dfference equaon: lagged endogenous varables ( π π, ) as GMM-ype nsrumens and all exogenous varables (X and Z) as addonal sandard nsrumens. Te dfference equaon used n our model s also: k k k j j j Z X,, 1, 1, 1, ε θ β π α π φ π = (2) We modfy e above models by addng macroeconomc varables adjused by ndcaors ( q l I X ). Tese ndcaors ( ) q I are dummy varables on banks jurdcal form or banks sze. Te am s o es e dfferenaed effecs of banks jurdcal form or banks balance-see sze n evens of macroeconomc socks. l q l l k k k j j j I X Z X,, 1, 1, 1, ε δ θ β π α π φ π = (2) l X : l- sgnfcan macroeconomc varables n model 1 q I : q- dummy varable; for example, bmc I =1 for muual and cooperave banks, 0 oerwse. 4. Resuls 4.1 Ne Ineres ncome correlaed w e yeld curve

14 Te able 5 below sows a e man macroeconomc and fnancal explanaory varables of ne neres ncome are n lne w wa could be expeced from e nuon. Frs, e coeffcen of e neres rae spread s slgly sgnfcan and posve. Ts resul sows a a ger refnancng source for banks s lkely o weg on er neres ncome and a conversely, a ger long-erm neres rae may posvely affec e revenues of e banks. Te radonal bankng acvy of ransformaon seems o play an mporan role as regards e ncome revenues. Lookng a e dummy varables counng for dfferenaed effecs concernng e ype of banks, we fnd unsurprsngly a e spread as explanaory varable for neres ncome s all e more mporan an s lnked o cooperave and muual nsuons, wc are supposed o rely more on radonal bankng acvy. Socks on e yeld curve ave a parcularly sgnfcan mpac on ose banks neres ncome, w a sensbly coeffcen of ( ) agans for all banks. On e oer and, socks on fnancal marke generally ave smlar mpacs on all banks. Second, e lagged endogenous varable proves o be posve and sgnfcan. Ts ends o aes e dynamc caracer of e specfcaon. Te coeffcen of e lagged endogenous varable akes a value of approxmaely 0.21, wc means a profs seem o perss o a moderae exen. Table 5: resuls for e ne neres ncome Ineres ncome coeffcen p coeffcen p Lag1(neres) 0.210** ** Lag1(commssons) Lag1(radng) *** GDP grow Spread 0.057* ** SBF250 reurn ** *** Capal Expendure Rsk Marke sare Spread * Ibmc 0.154*** Spread * Ilarge Sbf * Ibmc Sbf * Ilarge Non-auocorrelaon es AR(2) Wald es prob > F Sargan es prob > X² Number of obs Number of nsrumens

15 4.2 Pars of fees and commssons lnked o marke and cyclcal evoluon Our esmaon resuls (able 6) sugges a cyclcal varables are sascally sgnfcan. In parcular, sock marke reurns as well as GDP grow ave a posve mpac on e dynamcs of commssons and fees. A frs explanaon s relaed o e fac a fees and commssons are generaed by acves a are lnked w marke or economc condons. Tose acves nclude underwrng, fnancal servces, M&A or secures brokerage. A second reason s a banks ave developed an experse n exracng nformaon from e sock marke n order o generae profs. In a respec, e ger e SBF250 reurns, e more numerous e arbrage opporunes and us e ger e revenue generaed by ese acves. A large par of commssons and fees s manly srucural and depends on e funconng of e bankng sysem (paymen ransacons, safe cusody admnsraon accoun ec.) and on banks compeveness. Hence, regardng bank-specfc varables, several varables prove o be sgnfcan. Conrary o neres ncome, bankng commssons are drecly nfluenced by bankng srucure, suc as sraeges on expendure and cred rsk: more specfcally, e ger e rsk, e smaller e revenue semmng from fees and commssons. On e oer and, e ger e expendures, e ger e revenues comng from fees and commssons (recall a s varable was no sgnfcan for neres ncome): fees and commssons seems very muc relaed o oer producs, and f s ofen consdered as a burden for e overall profably, proves o mprove F&C revenues. Ineresngly, e lagged radng ncome s sgnfcanly posve, sowng a producs lnked o pas profs on radng acves are lkely o generae posve fees and commssons ncomes. 15

16 Table 6: resuls for fees and commssons Commssons coeffcen p coeffcen p Lag1(neres) Lag1(commssons) Lag1(radng) 0.454** ** 0.03 GDP grow 0.276** ** Spread SBF250 reurn * Capal Expendure 1.05*** *** Rsk ** ** Marke sare Spread * Ibmc Spread * Ilarge Sbf * Ibmc Sbf * Ilarge GDP * Ibmc GDP * Ilarge Non-auocorrelaon es AR(2) Wald es prob > F Sargan es prob > X² Number of obs Number of nsrumens Tradng ncome relaed o e fnancal marke performance Te lagged neres rae ncome exbs a clear negave coeffcen, ndcang a pas decreases n profs n radonal ncomes are followed by ncreases n revenues semmng from radng acves. Ts seds a new lg on e porfolo reallocaon beavour by banks, sowng a s beavour canno be gnored from a modellng pon of vew, and a no akng a effec no accoun would be lkely o overesmae e effec of unfavourable condons on e radng ncome. As regards e macroeconomc and fnancal deermnans, one may noe a radng ncome benefs from favourable marke and economc condons. No surprsngly, e regresson resuls mply a ger sock reurns end o ncrease radng ncome. GDP grow s close o sgnfcance, sowng a beer macroeconomc condons would ncrease radng revenues. As a resul, fnancal marke socks would srongly affec banks radng ncome. However, recesson sock would ave lesser mpac on radng ncome n comparson o oer ncomes, as e coeffcen of GDP grow s less g n e frs equaon (0.021) an n e oers (respecvely and 0.047). 16

17 We also observe a bankng expendure and marke sares ave srong nfluence on banks radng ncome as er coeffcen s bo gly sgnfcan. Table 7: resuls for radng ncome Tradng ncome coeffcen p Lag1(neres) *** Lag1(commssons) Lag1(radng) GDP grow Spread SBF250 reurn ** Capal Expendure 0.032*** Rsk Marke sare 0.023** Non-auocorrelaon es AR(2) 0.19 Wald es prob > F Sargan es prob > X² 0.35 Number of obs 1753 Number of nsrumens Sress esng Frenc banks ncome subcomponens Sress-ess denfy mos mporan economc and fnancal cannels of conagon of an nal sock a may affec e sably of e bankng secor. Indeed, marke and economc envronmen may affec banks' profably subcomponens. Te am of sress es exercses s o sudy e effecs of some predeermned macroeconomc or fnancal scenaros on relevan bankng varables, suc as profably as a wole or s subcomponens. 5.1 Sress-esng banks' ncome subcomponens Several sudes explore e mpac of neres rae rsk on banks profably roug neres margns. Brunn e al. (2005) explan e neres ncome anks o GDP grow; Dremann (2006) develops a balance-see approac o ake no accoun e neres rae effecs on e banks' economc value. De Band and Oung (2004) specfy a reduced form neres rae model esmaed on a panel daase of Frenc banks. Te explanaory varables are e yeld spread, s volaly, e loan grow and e cos of rsk. Van den End e al. (2006) specfy a smlar model for e ne neres ncome grow of Duc banks, were e ne neres ncome grow s manly explaned by GDP grow and lendng raes. 17

18 Papers focusng on non-neres ncome n e conex of sress ess are relavely rare and recen n e leraure. Te approaces by Lemann and Manz (2006) and Rouaba (2006), focusng on Swss and Luxemburg respecvely, conclude a e mpac of macroeconomc and fnancal socks on banks' profs s relavely modes, sowng a e wo bankng secors are reslen. Tey parcularly focus on e banks earnng srucure (neres ncome, provsons, revenues from radng acves and commssons) and e rsk a can poenally emerge from a srucure facng macro or fnancal socks. Here s very mporan o noce a our am s no o only sudy e mpac of one sock of one specfc explanaory varable on e ncome subcomponens, regardless of e mpac of suc a sock on e oer varables. On e conrary, e mpac of sress scenaros on e relevan rsk facors for e year s conssenly deermned w e Banque de France's macroeconomerc models (Mascoe and NIGEM). Ts means a, condonally on a specfc scenaro, we ge some sressed oupu varables of e macroeconomerc model (our sressed explanaory varables), wc are en used as sressed npus n our bankng models for e ree revenues subcomponens. Hence, we ge some sressed revenues componens, wc are compared o e varables go wou any sress (e. n lne w e bass lne of e macroeconomc forecas). More precsely, e neres raes are provded by e ECB: e sor rae s 3 mon forward rae and e long rae s obaned by prcng a 10 year governmen bond based on an esmaed erm srucure of e neres raes 8. A lmaon o s approac reles n e feaure a radonal macroeconomerc model. Even oug provdes an negraed and conssen framework o lnk e dfferen effecs of exogenous socks on key macro varables suc as GDP grow, loans or neres raes, e model s no clearly devoed o analyse fnancal relaonsps and ow dfferen agens n e sysem may be fnancally consraned. In oer words, n suc models, ere s no lm o cred demand from ouseolds, wc s n urn always sasfed. However, we ry o esmae a relaonsp beween CAC 40 sock reurn and volaly on e one and and e Mascoe macroeconomc oupus on e oer and usng a basc lnear mul-facor model approac. 8 Te neres rae erm srucure s esmaed w e Nelson-Segel (1987) model appled o money marke and swap raes n e Euro area 18

19 Anoer lmaon s relaed o e fac a our model does no am a akng no accoun of second round effecs, as only capures e effec of macroeconomc socks on bankng varables and no drecly a of bankng varables on macroeconomc and fnancal ones. In addon, our sress es exercses are carred ou all oer ngs beng equal: n parcular, we do no model any porfolo reallocaon, leadng o a sf from neres ncome o radng ncome, n case of, for nsance, a negave sock on e spread, leadng o a decrease of ne neres revenues. For ose reasons, seems muc more relevan o resrc our sress es exercse o e frs year of sock, gven a s lkely o avod any unrelable resul. 5.2 Model specfcaon coce and sress-esng banks' earnng srucure We desgn and es fve (severe bu plausble) ypoecal sress scenaros: - Inernal demand socks: - 1% GDP grow; - 2% GDP grow; - 3% GDP grow - Fnancal socks: a 25% deprecaon of e dollar agans e euro; a flaenng of e yeld curve (- 200 bp decrease of e Eurbor 3M and bp OAT 10Y) Te Table 8 presens e effecs of ose scenaros on our varables of neres (e varables a are used as npus n our bankng ncome subcomponens models), fgures 3 and 4 e mpacs of ose scenaros on our varables. Table 8: desgn of scenaros In devaon from e bass lne GDP grow Yeld curve SBF 250's reurn T+1 T+2 T+1 T+2 T+1 T+2 1-1% GDP grow -0,7-2,1 0,0 0,0-1,9-4,4 2-2% GDP grow -2,1-3,0 0,0 0,0-4,4-6,9 3-3% GDP grow -2,7-4,0 0,0 0,0-5,5-9,0 4-25% deprecaon of USD/EUR -1,0-0,5 0,0 0,0-1,7-1,8 5 Flaenng of e yeld curve 0,0 0,4-2,0-2,0 0,2 0,7 Noe: e forecas for e baselne scenaro for GDP grow. loan grow and neres raes s as of January Fgure 3 BP Impac on ncome componens compared o e baselne scenaro (n e year T+1) % GDP grow - 2% GDP grow - 3% GDP grow -25% deprecaon of USD/EUR Flaenng of e yeld curve (- 200bp ST, - 400bp LT) Ineres (T+1) Commssons (T+1) Tradng (T+1) 19

20 Fgure 4 Baselne scenaro - 1% GDP grow 2,0% 2,0% 1,5% 1,5% 1,0% 1,0% 0,5% 0,5% 0,0% 0,0% -0,5% T-2 T-1 T T+1 T+2-0,5% T-2 T-1 T T+1 T+2 neres ncome / asses commssons / asses radng ncome / asses neres ncome / asses commssons / asses radng ncome / asses - 2 % GDP grow - 3 % GDP grow 2,0% 2,0% 1,5% 1,5% 1,0% 1,0% 0,5% 0,5% 0,0% 0,0% -0,5% T-2 T-1 T T+1 T+2-0,5% T-2 T-1 T T+1 T+2 neres ncome / asses commssons / asses radng ncome / asses neres ncome / asses commssons / asses radng ncome / asses - 25% deprecaon of USD/EUR Flaenng of e yeld curve (- 200bp ST, - 400bp LT) 2,0% 2,5% 1,5% 2,0% 1,0% 1,5% 1,0% 0,5% 0,5% 0,0% 0,0% -0,5% T-2 T-1 T T+1 T+2-0,5% T-2 T-1 T T+1 T+2 neres ncome / asses commssons / asses radng ncome / asses neres ncome / asses commssons / asses radng ncome / asses A frs concluson o be drawn from fgures 3 and 4 s a regardless of e scenaro a we consder, fees and commssons revenues are muc more mpaced by adverse socks an radng ncomes, and an ne neres ncome, a seems e mos reslen. I s en sragforward o conclude a a ger sare of fees and commssons and radng ncome n oal bankng revenues s lkely o mpend on e reslence of fnancal nsuons. However, e spread flaenng sock s lkely o mpac essenally on e neres revenues. Tose resuls ave nevereless o be aken w g cauon, gven e g uncerany surroundng e macroeconomc modellng. Scenaros 1/ o 3/ (recesson socks) 20

21 Te recesson socks lead o e bgges negave effecs on ncome subcomponens. A 1% recesson sock would decrease e neres ncome by less an 10 bp, e radng ncome by abou 10bp and e fees and commssons by abou 20bp. Ts s essenally due o e g sgnfcan coeffcen relaed o GDP grow n e commssons and fees equaon resuls. W a recesson of 3%, e effecs would be more specacular, bu e qualave resuls would reman e same: an ample effec on commssons and fees, wc would go roug e GDP grow and e radng sock marke cannels. In s exreme case, abou 70 bp of commssons and fees revenues would be offse. Scenaros 4/ and 5/ Tose scenaros (especally e excange rae scenaro) are e leas unfavourable among all adverse socks esed. In parcular, as regards e ncome revenue, e effec of a flaenng yeld curve would be compensaed by e correspondng ncrease n e sock marke: e effec of a scenaro on e ncome revenue would be paradoxcally raer lmed. On e conrary, as regards e ne neres ncome, a parcular adverse scenaro gves e ges effec. A concluson o be drawn from ose exercses s a n general ne neres ncome s more sable an radng ncome and muc more sable an fees and commssons. In parcular scenaros, suc as a flaenng of e yeld curve, e ne neres ncome could be more mpaced an oer ncomes bu o a lesser exen. 6. Concluson Te evoluon of e Frenc bankng ndusry, n e same ven as n oer counres, ncreased neres devoed o e dversfcaon of banks ncome sources, and o analysng e cange n banks ncome srucure as a poenal rsk o ake no accoun. Income sources dversfcaon s ndeed a srucural rend n e bankng secor and rases several quesons, especally ose a are relaed o e sably of e fnancal sysem. Te leraure on s feld as become relavely large and e resuls are que dvergen. Globally, ncome source dversfcaon as a posve mpac on banks profably and seems o provde some sablsaon effecs on earnngs volaly. From a supervsory pon of 21

22 vew, ncome dversfcaon may srengen fnancal sably as more profable banks are more lkely o absorb losses n sress suaons. However, e corollary seems o be a e more banks are profable, e more ey ake excessve rsks. One callenge for bank supervsors s en o gauge e rsk akng accordng o e level of profably. Ts paper provdes some sascal evdence of sgnfcan economc and fnancal facors a affec banks ncome componens. Te sress es smulaons sow a mpacs are lkely o reaen e bankng secor, dependng nevereless on e ncome subcomponen esed. For e ECB (2000), fees and commssons seem o be e mos sable banks componen. Ts ncome source sould probably consue e larges par of banks revenues and may conrbue o a reducon of banks ncome volaly and cyclcaly. As e esmaon resuls sugges, fees and commssons ncome mg be more nfluenced by macroeconomc adverse scenaros an neres ncome, essenally because of s lnk w sock marke ssues. A sgnfcan par of commssons and fees comes from srucural bankng acves wc conrbue o e funconng of e fnancal sysem. Some acves generang commssons and fees seem o be more sensve o economc and fnancal condons bu mos of em also depend on e marke srucure (cusomer relaonsp, marke power, level of compeon, ec.). In s regard, e sress-es resuls sould be nerpreed w cauon. We can no conclude ye a ncome dversfcaon may decrease banks rsks. Focused on macro and fnancal approac, e sress-es smulaons sugges a ncome dversfcaon w more commsson and fee generang acves may exacerbae cyclcal rsk. Bu we can also nfer a may enance dosyncrac rsks, suc as operaonal, sraegc and repuaonal rsks. Tese rsks are underesmaed a s sage as s dffcul o smulae sress ess n s way. Supervsory auores sould pu en greaer empass on banks organsaon w more ransparency; complance and scruny of new producs, were new rsks emerge a are no clearly assessed. On e oer and, s mporan o recognze a any scenaro analyss s subjec o a number of lmaons. On e one and, n case of an exreme even, correlaon among varables and e mpac of macroeconomc socks may devae from e paern we observed n e pas. Snce France never experenced very exreme (combnaons of) adverse socks n e perod used for esmaon, one mg erefore argue a e model underesmaes e 22

23 effecs of exreme scenaros. On e oer and, a scenaro analyss ypcally assumes a banks canno adjus er exposure before ey are by a severe sock. If ey could reac quckly enoug, e damage resulng from adverse evens mg be smaller an suggesed. References Arellano M., Bond S., Some ess of specfcaon for panel daa: Mone-Carlo evdence and an applcaon o employmen equaons. Revew of Economc Sudes, n 58, p Balag B., Wu P., Unequally spaced panel daa regressons w AR(1) dsurbances. Economerc Teory, 15 p Baele L., Jonge O., Venne R., Does e sock marke value bank dversfcaon? Journal of Bankng & Fnance, vol. 31(7), p Blascke W., Jones M, Marjnon G., Pera SM, Sress Tesng of Fnancal Sysems: An Overvew of Issues, Meodologes and FSAP Experences. IMF Workng paper, n 01/88. Bunn P., Cunngam A., Dremann M., Sress esng as a oll for assessng sysemc rsks. Fnancal Sably Revew, p , June Davs P., Tuor K., Te cangng srucure of banks' ncome -an emprcal nvesgaon. Economcs and Fnance Workng Papers, Brunel Unversy, De Vncenzo A., Quaglarello M., Reddvà e Dversfcazone de rcav delle bance alane negl ulm dec ann. Sud e Noe d Economa Delgado J., Saurna J., Cred rsk and loan loss provsons: an analyss w macroeconomc varables. Workng Paper, Banco de Espana. De Band O., Oung. V., Blan des `sress ess' menés sur le sysème bancare franças. Revue de la Sablé Fnancère, n 5, November. Dremann M., A Marke Based Macro Sress Tes for e Corporae Cred Exposures of UK Banks. Workng Paper, Bank of England. Dreman M., Sorensen S., Srnga M., Te negraed mpac of cred and neres rae rks on banks: An economc value and capal adequacy perspecve. Bank of England Workng Paper, n 339. Elsnger H., A. Lear and M. Summer A New Approac o Assessng e Rsk of Inerbank Loans, Fnancal Sably Revew 3, Oeserrecsce Naonalbank 23

24 End van de J., Hoebercs M., Tabae M., Modellng Scenaro Analyss and Macro Sress-esng. DNB Workng Paper, n 119-Nov. 06. European Cenral Bank, Bank Income dversy and sysemc rsk. Fnancal Sably Revew, n 6, Aprl. European Cenral Bank, EU Banks' Income Srucure. Aprl. European Cenral Bank, EU Bankng Secor Sably. November European Cenral Bank, Large Banks and Prvae Equy-Sponsored Leveraged Buyous n e EU. Aprl European Cenral Bank, Leveraged Buyous and Fnancal Sably. Monly Bullen, Augus Hlbers, P., Jones M., Slack G., Sress Tesng Fnancal Sysems: Wa o Do Wen e Governor Calls. IMF Workng Paper 04/127 Hoggar, G., Sorensen S., Zccno L., Sress ess of UK banks usng a VAR approac. Workng Paper No 282, Bank of England. Kalra H., Scecer M., Macroeconomc Sress Tesng: Prelmnary evdence for Ausra. Fnancal Sably Repor 3, Öserrecsce Naonalbank. Lemann H., Manz M., Te exposure of Swss banks o Macroeconomc Socks: an Emprcal Invesgaon. Swss Naonal Banks Workng Papers, Lepe L., Rous P., Taraz A., Bank ncome srucure and rsk: An emprcal analyss of European banks. Journal of Bankng and Fnance. Kwan S., Laderman E., On e porfolo effecs of fnancal convergence -- A revew of e leraure. Economc Revew, Federal Reserve Bank of San Francsco, 1999, n.2. Pan D., Te provsonng experence of e major UK banks: a small panel nvesgaon. Bank of England Workng Paper, No Pesola J., Te role of macroeconomc socks n bankng crses. Bank of Fnland Dscusson Paper 6/2001. Rouaba A., La sensblé de l'acvé bancare aux cocs macroéconomques : une analyse en panel sur des données des banques Luxembourgeoses. Caer d'éudes, Banque Cenrale du Luxembourg, n

25 Salas V., Saurna J., Cred rsks n o nsuonal regmes: Spans commercal and savngs banks. Journal of Fnancal Servces Researc, 22(3): Saunders, Walers I., Unversal Bankng n e Uned Saes: Wa Could We Gan? Wa Could We Lose?. Oxford Unversy Press, New York, NY. Sm R, Sakouras C., Wood G., Non-neres ncome and oal ncome sably. Bank of England Workng Paper, n 198. Sorge M., Sress esng fnancal sysems: an overvew of curren meodologes. BIS Workng Papers, No Sro K., Dversfcaon n Bankng: s non-neres ncome e answer?. Journal of Money, Cred and Bankng, Vol. 36, n 5,p Vrolanen K., Macro Sress-esng w a Macroeconomc Cred Rsk Model for Fnland. Bank of Fnland Dscusson Papers, 18. Wooldrdge J.M., Economerc Analyss Cross Secon and Panel Daa, Cambrdge, MA MIT Press. 25