Electronic copy available at: http://ssrn.com/abstract=2547839 BANKS’ NON-TRADITIONAL ACTIVITIES UNDER REGULATORY CHANGES: IMPACT ON RISK, PERFORMANCE AND CAPITAL ADEQUACY Alaa Guidara a1 , Jean-Pierre Gueyié b , Van Son Lai a , Issouf Soumaré a This version: August 2014 ABSTRACT Using the big six Canadian chartered banks quarterly financial statements and daily stock market data from 1982 to 2010, we examine the impact of non-interest income on Canadian banks’ risk, performance and capital under the different major regulatory changes made to the Bank Act of Canada. We document a significant increasing trend in non-interest income with a substitution effect between non-interest income and net interest margin following the 1987 amendment to the Bank Act allowing commercial banks to acquire (or merge with) investment dealers and brokerage firms. Our results show that Canadian banks’ expansion into non-traditional activities had resulted into decreased risk and increased performance benefitting from income diversification. Moreover, while adhering to capital adequacy regulation, reshuffling banks’ portfolio towards non-traditional activities did not reduce Canadian banks’ capital ratio, buttressing the effectiveness of capital adequacy regulation in Canada in linking banks capital allocation with their risk taking in spite of the re-regulation towards universal banking. a Department of Finance, Insurance and Real Estate, Faculty of Business Administration, Laval University, Quebec, Canada. Emails: (A. Guidara) alaa.guidara@fsa.ulaval.ca, (VS. Lai) vanson.lai@fas.ulaval.ca, (I. Soumaré) issouf.soumare@fsa.ulaval.ca. b Department of Finance, School of Management, University of Quebec in Montreal, Quebec, Canada. Email: (JP. Gueyié) gueyie.jean-pierre@uqam.ca 1 Corresponding author. We thank participants at 2014 annual meeting of the Northern Finance Association in Ottawa, Canada, the 2014 International Conference of the Financial Engineering and Banking Society, the Centre for Money, Banking and Institutions (University of Surrey) and the Center for Research in Contemporary Finance (Fordham University), Surrey, Fordham, UK, July 2014, the 51 st annual meeting of Canadian Society of Economic Sciences (SCSE) in Sherbrook, the Mathematical Finance Days 2012 in Montreal, the 10 th annual conference of interuniversity's center of research in risks, economic politics and employment (CIRPEE) in Sainte Adèle and the 45 th annual conference of the Canadian Economic Association (CEA) at the University of Ottawa in Canada, for their useful comments. We also thank the Social Sciences and Humanities Research Council of Canada (SSHRC), the Quebecor Fund of Research in Societies and Cultures (FQRSC), the Financial Market Authority - Quebec, the Fonds Conrad Leblanc, and the Institute of Mathematical Finance (IFM2) for their financial supports. All errors and omissions are the authors’ sole responsibilities.