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The potential for portfolio diversification in financial services

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Author Info

  • Alan K. Reichert
  • Larry D. Wall

Abstract

The Gramm-Leach-Bliley Act sweeps away most of the barriers limiting the affiliation of banks with nonbank financial services providers. The focus now shifts to financial services executives who must decide which combinations provide the best opportunities to increase shareholder wealth. Existing empirical evidence suggests that an important consideration in this decision is the potential gain from portfolio diversification into new activities. The empirical evidence also suggests that the potential for such gain clearly exists. ; This article builds on earlier studies, in particular updating the contribution of Wall, Reichert, and Mohanty (1993). After reviewing studies since the 1993 article of the potential gains from diversification, the authors summarize the legal changes resulting from passage of the Gramm-Leach-Bliley Act. The article then updates the 1993 analysis of return on assets using data from the Internal Revenue Service (IRS) to cover the 1991-97 period and also examines return on equity from 1991 to 1997. ; The new empirical results are consistent with the prior study in finding substantial potential gains from diversification using IRS data. The results also support the earlier finding that the efficient combinations (lowest risk for any given level of return) vary through time, perhaps for reasons such as the macroeconomic environment or technology. For bankers, one positive change in the 1991-97 period over the 1970s and 1980s is that banks have become a larger part of the efficient financial services portfolio.

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Bibliographic Info

Article provided by Federal Reserve Bank of Atlanta in its journal Economic Review.

Volume (Year): (2000)
Issue (Month): Q3 ()
Pages: 35-52

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Handle: RePEc:fip:fedaer:y:2000:i:q3:p:35-52:n:v.85no.3

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Keywords: Gramm-Leach-Bliley Act ; Financial services industry ; Bank investments;

References

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  1. Larry D. Wall & Alan K. Reichert & Sunil Mohanty, 1993. "Deregulation and the opportunities for commercial bank diversification," Economic Review, Federal Reserve Bank of Atlanta, issue Sep, pages 1-25.
  2. Simon Kwan, 1998. "Securities activities by commercial banking firms' Section 20 subsidiaries: risk, return and diversification benefits," Working Papers in Applied Economic Theory 98-10, Federal Reserve Bank of San Francisco.
  3. Elizabeth S. Laderman, 2000. "The potential diversification and failure reduction benefits of bank expansion into nonbanking activities," Working Papers in Applied Economic Theory 2000-01, Federal Reserve Bank of San Francisco.
  4. Wall, Larry D., 1987. "Has bank holding companies' diversification affected their risk of failure?," Journal of Economics and Business, Elsevier, vol. 39(4), pages 313-326, November.
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Citations

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Cited by:
  1. Pierre-Guillaume Méon & Laurent Weill, 2005. "Can mergers in Europe help banks hedge against macroeconomic risk?," DULBEA Working Papers in, ULB -- Universite Libre de Bruxelles.
  2. Stiroh, Kevin J. & Rumble, Adrienne, 2006. "The dark side of diversification: The case of US financial holding companies," Journal of Banking & Finance, Elsevier, vol. 30(8), pages 2131-2161, August.
  3. Claudio Dicembrino & Pasquale Lucio Scandizzo, 2012. "Can Portfolio Diversification increase Systemic Risk? Evidence from the U.S and European Mutual Funds Market," CEIS Research Paper 240, Tor Vergata University, CEIS, revised 11 Jul 2012.
  4. Alan K. Reichert & Larry D. Wall & Hsin-Yu Liang, 2008. "The final frontier : the integration of banking and commerce. Part 2, risk and return using efficient portfolio analysis," Economic Review, Federal Reserve Bank of Atlanta.
  5. Aigbe Akhigbe & Jeff Madura, 2004. "Bank acquisitions of security firms: the early evidence," Applied Financial Economics, Taylor and Francis Journals, vol. 14(7), pages 485-496.
  6. Christian Calmès & Raymond Théoret, 2009. "The Impact of Off-Balance-Sheet Activities on Banks Returns: An Application of the ARCH-M to Canadian Data," RePAd Working Paper Series UQO-DSA-wp032009, Département des sciences administratives, UQO.
  7. Mercieca, Steve & Schaeck, Klaus & Wolfe, Simon, 2007. "Small European banks: Benefits from diversification?," Journal of Banking & Finance, Elsevier, vol. 31(7), pages 1975-1998, July.
  8. Yoram Landskroner & David Ruthenberg & David Zaken, 2005. "Diversification and Performance in Banking: The Israeli Case," Journal of Financial Services Research, Springer, vol. 27(1), pages 27-49, February.
  9. Diaz, Belen Diaz & Olalla, Myriam Garcia & Azofra, Sergio Sanfilippo, 2004. "Bank acquisitions and performance: evidence from a panel of European credit entities," Journal of Economics and Business, Elsevier, vol. 56(5), pages 377-404.
  10. Kevin Stiroh, 2006. "New Evidence on the Determinants of Bank Risk," Journal of Financial Services Research, Springer, vol. 30(3), pages 237-263, December.

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