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Risk, regulation, and bank holding company expansion into nonbanking

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Author Info
John H. Boyd
Stanley L. Graham
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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Publisher 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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Keywords: Bank holding companies ; Bank investments ; Risk;

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. 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. [Downloadable!] (restricted)
  2. 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. [Downloadable!] (restricted)
  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. [Downloadable!] (restricted)
  4. 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.).
  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. [Downloadable!]
  6. William F. Sharpe, 1977. "Bank Capital Adequacy, Deposit Insurance and Security Values, Part I," NBER Working Papers 0209, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Philip E. Strahan & Amir Sufi, 2001. "Expansion of bank powers: who gains the most?," Proceedings, Federal Reserve Bank of Chicago, issue May, pages 682-698.
  2. 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. [Downloadable!]
  3. Rosie Smith & Christos Staikouras & Geoffrey Wood, . "Non-interest income and total income stability," Bank of England working papers 198, Bank of England. [Downloadable!]
  4. 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. [Downloadable!] (restricted)
  5. 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. [Downloadable!]
  6. 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. [Downloadable!]
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