Banking System Stability Is Largely Built On A Number Of Internal And External Characteristics

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Banking system stability is mostly built on a number of internal and external characteristics. Wheelock and Wilson (2002) used a rating methodology called CAMEL, shorten from several variables include Capital adequacy, Asset quality, Management quality, Earning, Liquidity, to analyze the probability of bank failures. Their study documented that smaller banks and well-capitalized banks can obtain a higher degree of capacity to maintain stability individually, and comparing to universal banks, they contribute more to the stability of a nation 's banking system. Those variables reflect the internal environment for operations of an individual bank and may be varied while banks choose to diversify their revenue with the conglomeration of…show more content…
Over the period of 1996-2005, accounting data based researches showed that the universal banks can only increase the volatility of accounting profits by diversifying non-interest income and have no effect on raising their average profits. For American banks, there may be some benefits by introducing new business differing from traditional interest-income based derivatives, the profits are offset by the increasing exposure to the systemic risk that institutions may suffer. The similar result raised in Stiroh 's (2006) research in American equity market during 1996-2005. He concluded that, on the one hand, there is no apparent link between non-interest income exposure and average profits. On the other hand, the diversification of non-interest income has a strong and positive correlation with the volatility of equity return. Banks in European shared the similar phenomenon in which banks with non-interest business present a lower level of risk management capability than those who mainly focused on traditional interest-income activities. Recent findings state that compare to trading activities, bank 's conglomerate risk is mainly positively correlated with the scale of non-interest income (Lepetit 2008). Those studies dig deeply into European equity market to reach the relationship between market-based measures of the risk trade-off and the effect of income diversification. They concluded that in the long run, universal banks with a higher proportion of non-interest

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