This paper examines the relationship between fee income and net interest margins of banks. We use a sample of banks in the US over the period 1986-2012, and combine the Panel VAR with the GMM method. We find that changes in fee income have no impact on changes in net interest margins. However, a decrease in net interest margins is followed by an increase in fee income in the subsequent year. This result is more pronounced for large banks after the passage of the Gramm-Leach-Bliley Act in 1999, which increased banks’ ability to generate fee income. We conclude that large banks can increase their fee income to offset the decrease in net interest margins.
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