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Banks’ Ability to Generate Income after the Crisis

Has the financial crisis affected banks’ ability to generate income? Has it forced them to generate income in new ways? To answer these questions, we look at banks’ net income and two components of net income, net interest income and net noninterest income. We find that although net income has recovered and is now beyond where it was before the crisis, the crisis has affected the income-generating capacity of large and small banks differently.

Net income (which economists call profit) has been increasing at banks both large and small since the end of the crisis. At large banks, net income had been on an upward trajectory since 2000, but after the crisis hit, it crashed. Around mid-2009, it began to recover and has now been higher on average than before the crisis. At small banks, the path of net income is similar. Before the crisis, it was slightly increasing, and during the crisis, it dipped severely. It is currently trending up and is now at a higher level than before the crisis.

Figure 1: Net Income for Large Banks
Figure 2: Net Income for Small Banks

Net noninterest income also looks similar at large and small banks since the crisis. Net noninterest income is income from banks’ other revenue-generating activities, like trading and fees, minus noninterest costs, like salaries and benefits. Since the crisis, net noninterest income has transitioned to a lower level at banks both small and large.

Figure 3: Net Noninterest Income for Large Banks
Figure 4: Net Noninterest Income for Small Banks

Net interest income, on the other hand, has followed different trends at large and small banks since the crisis. Net interest income is roughly what the bank makes off the difference in interest between what it borrows and what it lends. At large banks, net interest income has plateaued, while at small banks, it continues on an upward trend uninterrupted by the crisis.

Figure 5: Net Interest Income for Large Banks
Figure 6: Net Interest Income for Small Banks

If we sum net interest and noninterest income, we get a measure of net income that excludes provisions for loan losses and other extraordinary items. Since banks can smooth out changes in net income by changing the provisioning for loan losses, this sum provides a less window-dressed measure of the ability to generate income. As expected, the crisis did not have as substantial an effect on this sum as on net income. It rose before the crisis, experienced high fluctuations during it, and has levelled off since then. In terms of levels, large banks are faring well relative to where they were before the crisis, but the absence of an upward trend shows a marked contrast with the experience of smaller banks. At small banks, the effect of the crisis is transient. Fluctuations increased around the trend, but the same upward trend continues after the crisis.

Figure 7: Sum of Net Interest and Noninterest Income for Large Banks
Figure 8: Sum of Net Interest and Noninterest Income for Small Banks

From these upward trends in the sum of net interest and noninterest income, we deduce that the crisis did not have a material effect on the income-generating process of small banks, the decrease in net noninterest income notwithstanding. Large bank’s income generation, however, seems to have stalled. Most of the action we see in net income is missing from the sum of net interest and noninterest income. This shows that transient changes in provisioning for loan losses may be the driver behind the net income increase at large banks.

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