Banks' noninterest income and securities holdings in a low interest rate environment: The case of Italy

• Published date: 01 January 2021
• Author: Philip Molyneux,Alessio Reghezza,Chiara Torriero,Jonathan Williams
• Date: 01 January 2021
• DOI: http://doi.org/10.1111/eufm.12268

Eur Financ Manag. 2021;27:98–119.wileyonlinelibrary.com/journal/eufm98

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© 2020 John Wiley & Sons Ltd.

DOI: 10.1111/eufm.12268

ORIGINAL ARTICLE

Banks' noninterest income and securities

holdings in a low interest rate environment:

The case of Italy

Philip Molyneux

1

|Alessio Reghezza

2

|Chiara Torriero

3

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Jonathan Williams

2

1

College of Business Administration,

University of Sharjah, Sharjah, UAE

2

Bangor Business School, Hen Goleg,

Bangor University, Bangor, UK

3

Dipartimento Vigilanza Bancaria e

Finanziaria, Banca d'Italia, Rome, Italy

Correspondence

Chiara Torriero, Dipartimento Vigilanza

Bancaria e Finanziaria, Banca d'Italia, Via

Nazionale 187, 00184 Rome, Italy.

Email: chiara.torriero@bancaditalia.it

Abstract

Using a sample of 440 Italian banks over the period

2007–2016, we find that low interest rates motivate

banks to expand their fee and commission income and

to restructure their securities portfolios. A granular

breakdown suggests that banks grow noninterest

income in various ways, including portfolio manage-

ment, brokerage and consultancy services and increase

fee income from current account and payment services.

In addition, banks rebalance securities portfolios away

from those “held for trading”to securities “available for

sale”and “held to maturity.”Our findings allude to

different behavior between large and small banks: while

larger banks increase brokerage, consultancy and

portfolio management services, smaller banks generate

fees from customer current accounts.

KEYWORDS

fee and commission income, Italian banking sector, low interest

rates, securities, unconventional monetary policy

JEL CLASSIFICATION

E43; E44; E52; G21; F4

EUROPEAN

FINANCIAL MANAGEMENT

We thank John Doukas (the editor) and an anonymous referee for their insightful comments and suggestions. Reghezza

acknowledges financial support from the Schiavone‐Tantazzi family from whom he received a scholarship titled “Dott.

Giuseppe Tantazzi”issued by the Rotary Club Genoa (distretto 2032). The views expressed in this paper are those of the

authors and should not be attributed to the organization they represent.

1|INTRODUCTION

Since the peak of the global financial crisis in 2008 and the ensuing economic downturn, the

European Central Bank (ECB), like other central banks, has implemented a range of un-

conventional monetary policy (UMP) measures to boost national economies. The measures

include nonstandard monetary policies, including large‐scale asset purchases, quantitative

easing, forward guidance and the negative interest rates policy (NIRP), and the outcome has

been historically low policy and/or official interest rates.

1

This has led policy‐makers to express

concern at the negative impact on bank margins and profitability (Alessandri & Nelson, 2015;

Molyneux, Reghezza, & Xie, 2019).

2

The impact of low interest rates on bank profitability is ambiguous because low rates lead to

opposite effects on various income statement items (Riksbank, 2016). Ceteris paribus, low policy

rates increase the demand and supply of credit that positively affect bank interest revenues.

Other expansionary monetary policies boost bank reserves, therefore, increasing the quantity of

available funds (Bernanke & Gertler, 1995). The reduced cost of capital can improve creditors'

ability to repay loans and, in turn, lessen loan losses (Altavilla, Boucinha, & Peydro, 2019).

Lower interest rates could generate gains on fixed‐income securities,

3

but it depends whether

securities are held for trading, held to maturity or available for sale. For trading book securities,

gains feed directly to the income statement. whereas available‐for‐sale securities are classified

as equity, and the effect of interest rate changes is zero if securities are held to maturity. In low

interest rate environments, banks may decide, on the one hand, to increase securities held for

trading to exploit interest rate cuts and realize gains on their trading portfolios. However,

protracted periods of low interest rates exhaust the possibility of further rate cuts, and this,

concomitantly with compressed margins and profits, may motivate banks to reshuffle their

securities portfolio from held for trading toward available for sale and/or held to maturity.

In low interest rate environments, banks might also try to expand fee and commission

income. Since fees and commissions are earned from a diversified array of services –such as

noninterest income derived from transaction and credit services to brokerage and portfolio

management, identifying the link between interest rates and these items can be challenging.

There are two possible channels through which the interest rate environment influences fee

and commission income. Low yields can cause bank customers to demand more professional

services for the purpose of portfolio management (Albertazzi & Gambacorta, 2009). On the

supply side, low interest rates boost asset prices and volumes, which positively impacts fees

directly linked to servicing such business. Furthermore, in a low interest rate environment

banks' incentive to search for yield is stronger (Borio & Zhu, 2012; Rajan, 2006), which

influences banks to sell more services to customers to boost fee and commission income.

1

See; Bowdler and Radia (2012), Chen, Filardo, He, and Zhu (2016), Cour‐Thimann and Winkler (2013), Eser and

Schwaab (2016), Gambacorta, Hofmann, and Peersman (2014), Gertler and Karadi (2011), and Heider, Saidi, and

Schepens (2019) for an overview of the UMP literature.

2

Official rates in Italy are set by the ECB. The two main official rates are the marginal lending rate (the rate at which

banks can borrow from the ECB overnight) and the rate on the deposit facility (this is the interest banks receive –or

have to pay in times of negative interest rates –for depositing money with the ECB overnight). The marginal lending

rate fell from 5.25% in July 2008 to 0.4% by June 2014 and has gradually continued to fall to 0.25% by September 2019.

The deposit facility rate has fallen from 3.25% in July 2008, first went negative at −0.1% in June 2014 and has remained

negative since then, standing at −0.5% by September 2019. The euro interbank rate Euro OverNight Index Average

(EONIA) is the average interest rate for interbank 1‐day lending in euros. This fell from 3.72% in January in 2008 to

−0.079% in January 2015 and has stayed negative (−0.451%) up to September 2019.

3

This effect is just temporary. It reflects interest rate changes and disappears when the change is over.

MOLYNEUX ET AL.EUROPEAN

FINANCIAL MANAGEMENT

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