The Traditional Model Of Banking

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1. Introduction
Over recent decades, there has been a decline in the traditional model of banking with a shift in banking structure. Interest income has fallen as a percentage of operating revenue while the percent¬age of non-interest income has risen dramatically. In 1980, the non-interest income of banks accounted for 20 per cent of the operating revenue of the US banking industry; by 2004, this had increased to 42 per cent (Stiroh, 2006). Similarly, over the last two decades in Australia, fees from deposits, loans and payment services totalled $11.6 billion, an increase of 8 per cent on the previous year (Reserve Bank of Australia Bulletin, 2009). However, this figure is somewhat understated as it does not include all items of non-interest income such as fees from fund management, underwriting and insurance activities. In Australia, the increase in fee income reported came from not only an increase in fees but also from growth in the size of non-interest income assets. In other words, increases in fee income, through a gradual introduction of fee items to traditional interest bearing accounts, have been somewhat overshadowed by the growth in the volume of non-interest earning transactions. For instance, the average growth of bank service fees was 7.9 per cent between 2001 and 2009, while banks’ residential assets grew at almost double this rate (14.5 per cent) (Australian Bankers’ Association, 2010).
The conventional wisdom for diversifying into non-interest income is
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