Product mix and earnings volatility at commercial banks: Evidence from a degree of total leverage model

We construct a degree-of-total-leverage framework to test whether and how s hifts in product mix affect earnings volatility at 472 U.S. commercial bank s between 1988 and 1995. Our framework, which accounts for cost and revenue synergies net captured in most previous studies, conceptually links earnin gs volatility to revenue volatility, expense fixity, and product mix. We fi nd that replacing traditional lending activities with fee-based activities- an ongoing trend that may be strengthened by recent financial modernization -is associated with both higher revenue volatility and higher total leverag e, which in this framework implies higher earnings volatility. Journal of E conomic Literature Classification Numbers: G21, G32, D24. (C) 2001 Academic Press.