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An Update on Emerging Issues in Banking

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For Your Information An Update on Emerging Issues in Banking
New Reporting Offers Insight Into Bank Activities
April 18, 2002


Noninterest income has grown in importance at commercial banks for almost 25 years. Until last year, however, the quarterly Reports of Income that banks filed with federal regulators provided only limited detail on noninterest revenues. Last year, these reports began to include more detail on the relative importance of different activities and products to bank earnings. The new data show that some significant revenue sources are overwhelmingly concentrated in a few institutions, while other activities—notably insurance—are conducted by thousands of small banks across the U.S.

Noninterest income has become more important for banks (Chart 1) as nonbank competition for loan customers, especially in sectors such as home mortgage lending and lending to large commercial borrowers, has limited growth in net interest income. At the same time, banks' enhanced ability to market and deliver fee-earning transactional services, made possible by advances in telecommunications and data processing, and the development of new financial products, aided by deregulation and innovation, have produced a growing number of sources of noninterest income. This trend has been evident at both large and small banks, although larger banks have consistently obtained a significantly greater share of their revenues from noninterest sources. Greater diversification in revenues should promote greater stability and consistency in bank earnings. While some noninterest revenue sources are sensitive to conditions in financial markets, and may be more volatile over time than net interest income, other noninterest revenues, notably those obtained from transaction-based services, should be less susceptible to cyclical influences.

Noninterest revenue as a Percent of Net Operating Revenue 1975-2001*D

Before 2001, banks reported the amounts of their noninterest income that consisted of service charges on deposit accounts, fiduciary (trust) income, and revenues from trading operations. Any other sources of noninterest income were reported in the residual categories of "Other Fee Income" and "All Other Noninterest Income." The new report format introduced in the first quarter of 2001 still includes fiduciary income, deposit service charges, and trading revenues, but it now also breaks out income from investment banking services, revenues from venture capital investments, servicing fees, income from asset securitization activities, insurance commissions and fees, and proceeds from sales of loans, other real estate, and other assets. With this information, it is possible to examine the relative importance of each of these income sources to bank revenues, and see how widespread these business lines are among insured commercial banks.

During 2000, the residual categories of "other fee income" and "all other noninterest income" together comprised almost two-thirds (62.5 percent) of all noninterest income reported by insured commercial banks. The new categories reported in 2001 provide a more detailed look at roughly half of these "other" revenues. The data show that securitization income (net gains on sales of securitized assets plus non-servicing fees), at $16.4 billion for the year, represented the largest amount of any of the new categories. The next-highest category was servicing fees, at $11.6 billion. Fees and commissions from investment banking, advisory, brokerage, and underwriting services totaled $9.1 billion in 2001. Sales of loans, other real estate, and other assets yielded net gains of $7.0 billion. Insurance commissions and fees totaled $2.9 billion, while venture capital activities produced a net loss of $740 million for the year. The remaining category of "all other" noninterest income, which includes income from unconsolidated subsidiaries, data processing services, ATM usage fees charged to depositors from other institutions, as well as service charges and fees for a variety of other services, was still the largest component of total noninterest income. At $51.3 billion, it represented 32.7 percent of commercial banks' noninterest income in 2001.

Table 1
Noninterest Income Of Insured Commercial Banks, 2001
(Amounts in $ Thousands)

Noninterest Income Category Full Year Amount % of Total # of Banks Reporting Combined Share of 5 Largest Reported Amounts
Income from fiduciary activities 20,751,226 13.2% 1,668 39.4%
Service charges on deposit accounts 26,472,609 16.8% 7,909 33.9%
Trading revenues 12,524,834 8.0% 175 82.6%
  On interest-rate contracts 6,075,878 3.9% 106 85.1%
  On foreign exchange contracts 4,338,966 2.8% 47 82.5%
  On equity contracts 1,878,327 1.2% 20 95.4%
  On commodity & other contracts 231,663 0.1% 10 N/M
Investment banking & other fees 9,096,981 5.8% 2,178 55.8%
Venture capital revenue -740,222 -0.5% 61 N/M
Servicing fees 11,568,730 7.4% 1,626 41.5%
Securitization income 16,349,975 10.4% 100 64.0%
Insurance commissions & fees 2,874,938 1.8% 4,063 38.4%
Net gains/losses on loan sales 4,642,565 3.0% 1,739 47.5%
Net gains/losses on sales of OREO 65,348 0.0% 2,129 N/M
Net gains/losses on sales of other assets 2,249,208 1.4% 2,321 84.6%
Other noninterest income 51,335,770 32.7% 7,983 21.2%
Total noninterest income 157,171,912   8,050  
Source: Bank Call Reports (Research Information System)

Table 1 shows the amounts of noninterest income in its component categories, as well as the number of banks reporting non-zero amounts in each category. It also shows the share of income in each category represented by the combined totals of the five largest amounts reported, to provide an indication of how highly concentrated each underlying activity was within the banking industry during 2001. Based on the frequency of nonzero amounts reported, service charges on deposit accounts were the most widespread and were the largest identifiable dollar category. Although far less important in terms of dollars, insurance-related activities were the next most widespread; more than half of the 8,080 commercial banks at year-end reported some income from these activities. At the other end of the scale, only 61 banks reported any results from venture capital investments, and only 100 banks reported any income from securitization activities.

As an indicator of concentration within different activities, the combined shares of the five largest reporters in each category varied widely. The five largest reporters accounted for 84.6 percent of the $2.2 billion in gains from sales of other assets, and almost two-thirds of the $16.4 billion in securitization income reported by commercial banks in 2001, while the five largest amounts reported for insurance commissions and fees represented only 38.4 percent of the industry's total income in this category. Most of the industry's income from securitization activities was earned by 24 specialized credit-card banks; they accounted for 86.4 percent of all securitization income reported in 2001.

Just as large and small banks show different relative levels of noninterest income, they also show significant differences in the composition of their noninterest revenues. Larger banks as a group exhibit greater diversification in their noninterest revenues. For commercial banks with assets greater than $1 billion, three of the new categories—securitization income (11 percent), servicing fees (7 percent), and investment banking income (6 percent)—provide more than 5 percent of the group's aggregate noninterest income. The largest identifiable category for large banks, service charges, comprised only 16 percent of their noninterest income (Chart 2). Banks with less than $1 billion in assets, in contrast, have more of their noninterest revenues (29%) concentrated in service charges. Of the newly reported activities, only servicing fees (7 percent) provided more than 5 percent of aggregate noninterest income for small banks in 2001 (Chart 3).

Composition of Noninterest Income, Commercial Banks with Assets Greater Than $1 Billion, Full Year 2001.D

Composition of Noninterest Income, Commercial Banks with Assets Less Than $1 Billion, Full Year 2001.D

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Last Updated 04/18/2002 fyi@fdic.gov