Bank size, credit and the sources of bank market risk
AbstractThis study examines bank risk by investigating the equity and loan portfolio characteristics of publicly-traded bank holding companies. Unlike the pattern for non-financial firms, equity betas of large banks are two to five times greater than those of small banks. In explaining this, we note that regulation imposes an effective cap on banks' equity volatility. Because the portfolios of small banks are less diversified, this cap has a greater effect on small banks than large banks. But we reject the hypothesis that small banks lower their equity volatility through lower leverage. Instead, we find that the reduced ability of small banks to diversify forces them to either pick borrowers whose assets have relatively low credit risk or make loans that are backed by relatively more collateral.
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Bibliographic InfoPaper provided by Bank for International Settlements in its series BIS Working Papers with number 238.
Length: 35 pages
Date of creation: Nov 2007
Date of revision:
FBank size; beta; idiosyncratic; volatility;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-12-19 (All new papers)
- NEP-BAN-2007-12-19 (Banking)
- NEP-REG-2007-12-19 (Regulation)
- NEP-RMG-2007-12-19 (Risk Management)
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.:
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