The chicken or the egg? The trade-off between bank fee income and net interest margins

This study considers the time series relationship between bank fee income and bank net interest margins in Australia, applying panel vector autoregressions to a unique, hand-collected dataset. Increases in bank fee income are being used to supplement decreases in net interest margins. The increase in magnitude of fee income associated with reductions in margin income is smaller than the decrease in net interest margins, resulting in a net wealth transfer favouring users of bank services; although not all users of bank services gained and/or gained equally. The overall increase in fee income is marginally greater that the reduction in margin income. It is argued that banks have responded to falling margin revenue by increasing their range of fee-based services, especially insurance. Increases in fee income are found to pre-date declines in margin income, thus Australian banks were pro-active in the process of disintermediation.