Mitigating or magnifying systemic risk? The role of non-interest income during market disruptions

• In a pandemic-led liquidity crisis, banks diversify risk via non-interest activities. • In war-driven sector-specific shock, relying on non-interest income heightens risk. • Trading revenue impacts bank risks during these market disruptions. • Lower risk exposure in non-interest revenue streams enhances profitability in crises. We examine how non-interest income affects U.S. banks' systemic risk during financial disruptions. Using quarterly data from 2010–2023 and marginal expected shortfall as our risk measure, we find that non-interest income reduces systemic risk during the market-wide liquidity crisis caused by the COVID-19 pandemic, but increases risk during the Russia-Ukraine conflict, a sector-specific disruption. Trading income, rather than fee-based income, drives these effects. Our findings suggest banks strategically employ non-interest activities for risk diversification during broad liquidity crises, with implications for calibrating regulatory oversight.