Kevin J. Stiroh examines whether the shift in U.S. banking toward noninterest income provides diversification benefits. The paper analyzes data from the late 1970s to 2001, finding that noninterest income, while growing in importance, has not significantly reduced the volatility of bank profits or revenues. At the aggregate level, declining volatility in net operating revenue is attributed to reduced volatility in net interest income, not diversification benefits from noninterest income. At the bank level, the correlation between net interest income and noninterest income growth has increased, suggesting that diversification benefits are diminishing. Noninterest income, particularly trading revenue, is associated with higher risk and lower risk-adjusted profits. The paper also finds that noninterest income is more volatile and increasingly correlated with net interest income, reducing the potential for diversification. Overall, the results suggest that the shift toward noninterest income does not provide significant diversification benefits and may even worsen the risk/return trade-off for banks. The paper also reviews existing literature on bank diversification, finding mixed results, and concludes that the shift toward noninterest income is not necessarily beneficial for reducing risk or improving profitability.Kevin J. Stiroh examines whether the shift in U.S. banking toward noninterest income provides diversification benefits. The paper analyzes data from the late 1970s to 2001, finding that noninterest income, while growing in importance, has not significantly reduced the volatility of bank profits or revenues. At the aggregate level, declining volatility in net operating revenue is attributed to reduced volatility in net interest income, not diversification benefits from noninterest income. At the bank level, the correlation between net interest income and noninterest income growth has increased, suggesting that diversification benefits are diminishing. Noninterest income, particularly trading revenue, is associated with higher risk and lower risk-adjusted profits. The paper also finds that noninterest income is more volatile and increasingly correlated with net interest income, reducing the potential for diversification. Overall, the results suggest that the shift toward noninterest income does not provide significant diversification benefits and may even worsen the risk/return trade-off for banks. The paper also reviews existing literature on bank diversification, finding mixed results, and concludes that the shift toward noninterest income is not necessarily beneficial for reducing risk or improving profitability.