Non-interest income, bank size and systemic risk: what is the role of financial development?

This paper examines the effect of banks’ non-interest income on various components of systemic risk and examines the moderating role of bank size. Using data from listed banks across 69 countries from 2010 to 2020, we find that an increase in non-interest income raises both the systematic and excess components of banks’ systemic risk. Contrary to the findings of De Jonghe et al. (2015), which suggest that the positive effect of non-interest income on systemic risk diminishes as bank size increases, we observe that this negative interaction effect of bank size disappears in the post-financial crisis period. Specifically, improvements in financial development significantly weaken this negative interaction effect of bank size. Additionally, the impact of different aspects of financial development on this negative interaction effect varies. We find that in countries with greater financial openness and stronger creditor protection, the negative interaction effect is significantly weakened and may even reverse. Conversely, financial innovations tend to amplify the negative interaction effect.