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Risk, regulation, and bank holding company expansion into nonbanking

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  • John H. Boyd
  • Stanley L. Graham
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    Abstract

    When banking institutions can expand into other lines of business, some think they will diversify to reduce their total risk. Others think just the opposite. In this article, John H. Boyd and Stanley L. Graham explain the reasoning behind these two views and then test to see which one best describes the behavior of U.S. bank holding companies since 1970. They find that in 1971-77, when these companies were relatively free to invest in some new lines of business, diversification was associated with greater risk of failure. But in 1977-83, when the companies were more tightly regulated, that association disappeared. These findings suggest to Boyd and Graham that, left to their own devices, bank holding companies will expand into new lines of business to increase their risk, but that regulation can control this risk-taking -- at least for the lines of business bank holding companies are currently allowed.

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    Bibliographic Info

    Article provided by Federal Reserve Bank of Minneapolis in its journal Quarterly Review.

    Volume (Year): (1986)
    Issue (Month): Spr ()
    Pages: 2-17

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    Handle: RePEc:fip:fedmqr:y:1986:i:spr:p:2-17:n:v.10no.2

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    Related research

    Keywords: Bank holding companies ; Bank investments ; Risk;

    References

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    1. Buser, Stephen A & Chen, Andrew H & Kane, Edward J, 1981. "Federal Deposit Insurance, Regulatory Policy, and Optimal Bank Capital," Journal of Finance, American Finance Association, vol. 36(1), pages 51-60, March.
    2. William F. Sharpe, 1977. "Bank Capital Adequacy, Deposit Insurance and Security Values, Part I," NBER Working Papers 0209, National Bureau of Economic Research, Inc.
    3. Merton, Robert C., 1977. "An analytic derivation of the cost of deposit insurance and loan guarantees An application of modern option pricing theory," Journal of Banking & Finance, Elsevier, vol. 1(1), pages 3-11, June.
    4. David R. Meinster & Rodney D. Johnson, 1979. "Bank Holding Company Diversification and the Risk of Capital Impairment," Bell Journal of Economics, The RAND Corporation, vol. 10(2), pages 683-694, Autumn.
    5. Rodney N. Johnson & David R. Meinster, 1974. "Bank Holding Companies: Diversification Opportunities in Nonbank Activities," Eastern Economic Journal, Eastern Economic Association, vol. 1(4), pages 316-323, October.
    6. Stephen A. Rhoades & Gregory E. Boczar, 1977. "The performance of bank holding company-affiliated finance companies," Staff Studies 90, Board of Governors of the Federal Reserve System (U.S.).
    7. Chase, Samuel B, Jr & Mingo, John J, 1975. "The Regulation of Bank Holding Companies," Journal of Finance, American Finance Association, vol. 30(2), pages 281-92, May.
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    Cited by:
    1. David P. Ely & Kenneth J. Robinson, 1999. "The determinants of the wealth effects of banks' expanded securities powers," Financial Industry Studies Working Paper 99-1, Federal Reserve Bank of Dallas.
    2. Rime, Bertrand & Stiroh, Kevin J., 2003. "The performance of universal banks: Evidence from Switzerland," Journal of Banking & Finance, Elsevier, vol. 27(11), pages 2121-2150, November.
    3. Elizabeth S. Laderman & Randall J. Pozdena, 1991. "Interstate banking and competition: evidence from the behavior of stock returns," Economic Review, Federal Reserve Bank of San Francisco, issue Spr, pages 32-47.
    4. Gallo, John G. & Apilado, Vincent P. & Kolari, James W., 1996. "Commercial bank mutual fund activities: Implications for bank risk and profitability," Journal of Banking & Finance, Elsevier, vol. 20(10), pages 1775-1791, December.
    5. Puspa Amri & Apanard P. Angkinand & Clas Wihlborg, 2011. "International comparisons of bank regulation, liberalization, and banking crises," Journal of Financial Economic Policy, Emerald Group Publishing, vol. 3(4), pages 322-339, November.
    6. Robert DeYoung & Karin P. Roland, 1999. "Product mix and earnings volatility at commercial banks: evidence from a degree of leverage model," Working Paper Series WP-99-6, Federal Reserve Bank of Chicago.
    7. Wahyu Yuwana Hidayat & Makoto Kakinaka & Hiroaki Miyamoto, 2012. "Bank Risk and Non-Interest Income Activities in the Indonesian Banking Industry," Working Papers EMS_2012_03, Research Institute, International University of Japan.
    8. Thierno Amadou Barry & Laetitia Lepetit & Amine Tarazi, 2011. "Ownership structure and risk in publicly held and privately owned Banks," Post-Print hal-00785225, HAL.
    9. 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.
    10. Lepetit, Laetitia & Nys, Emmanuelle & Rous, Philippe & Tarazi, Amine, 2008. "Bank income structure and risk: An empirical analysis of European banks," Journal of Banking & Finance, Elsevier, vol. 32(8), pages 1452-1467, August.
    11. Gary Whalen, 1999. "Trends in Organizational Form and their Relationship to Performance: The Case of Foreign Securities Subsidiaries of U.S. Banking Organizations," Journal of Financial Services Research, Springer, vol. 16(2), pages 181-218, December.
    12. Rosie Smith & Christos Staikouras & Geoffrey Wood, 2003. "Non-interest income and total income stability," Bank of England working papers 198, Bank of England.
    13. Lepetit, Laetitia & Strobel, Frank, 2013. "Bank insolvency risk and time-varying Z-score measures," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 25(C), pages 73-87.

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