Banks' interest incomes in various inflationary environments

The paper investigates determinants driving the banks to shifts between their interest–based and
non interest–based activities under the influence of various monetary regimes and debt policies. Bank
sectors of Poland, as low inflationary environment and Ukraine, as high inflation environment, were
studied. Our empirical findings suggest that monetary policy regime, risk spreads, different debt loads
and magnitudes of inflationary shocks all contribute to changing the ratio of interest to non–interest
incomes. Yet, in economy with inflation targeting and lower debt–to–GDP ratio risk spreads, defined as
difference between lending rates and relevant government bond yields, are more effective in lowering
interest incomes than in more volatile inflationary environment due to risk aversion of banks to new lending. Real deposit rates are barely important factors since both economies are banking–based.
Rising proportion of government bonds in bank assets negatively impacts interest incomes in relation
to total incomes in a more inflationary and indebted economy, while it increases this proportion in a less
indebted economy, which we attribute to stable demand for safe assets in low inflation environment.
In the meanwhile, narrowing risk spreads resulting from increases in government borrowing, lead to
investment crowd–out and more fee–oriented banking sector.