This file is part of IDEAS, which uses RePEc data


[ Papers | Articles | Software | Books | Chapters | Authors | Institutions | JEL Classification | NEP reports | Search | New papers by email | Author registration | Rankings | Volunteers | FAQ | Blog | Help! ]

Securities activities by commercial banking firms' Section 20 subsidiaries: risk, return and diversification benefits

Author info | Abstract | Publisher info | Download info | Related research | Statistics
Author Info
Simon Kwan

Additional information is available for the following registered author(s):

Abstract

This paper studies the implications of securities activities on bank safety and soundness by comparing the ex-post returns between banking firms' Section 20 subsidiaries -- subsidiaries that were authorized by the Federal Reserve to conduct bank-ineligible securities activities -- and their commercial bank affiliates. I found that securities subsidiaries that are primary dealers of government securities, their higher risk partially comes from their higher leverage, whereas for those that are not primary dealers, despite having lower leverage, they tend to be riskier than their bank affiliates partly because of their aggressive trading behavior. Nevertheless, securities subsidiaries appear to provide diversification benefits to bank holding companies, as evidenced by the low return correlation between bank subsidiaries and securities subsidiaries. Within the class of securities activities, I found that securities trading tends to be more profitable and riskier than banking activities. Trading activities engaged by primary dealer securities subsidiaries tend to provide strong diversification benefits to banking activities, reducing the banking organization's overall risk. For non-primary dealers, due to their aggressive trading behavior, their trading activities were found to increase the firm's total risk. On the other hand, securities underwriting is found to be riskier, and in the case of non-primary dealers also less profitable, than banking activities. Nevertheless, its return exhibits low correlation with banking return and trading return, suggesting that securities underwriting provides potential diversification benefits to both banking and trading activities.

Download Info
To download:

If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. In case of further problems read the IDEAS help file. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.sf.frb.org/econrsrch/workingp/wp98-10.pdf
File Format: application/pdf
File Function:
Download Restriction: no

Publisher Info
Paper provided by Federal Reserve Bank of San Francisco in its series Working Papers in Applied Economic Theory with number 98-10.

Download reference. The following formats are available: HTML, plain text, BibTeX, RIS (EndNote), ReDIF
Length:
Date of creation: 1998
Date of revision:
Handle: RePEc:fip:fedfap:98-10

Contact details of provider:
Postal: P.O. Box 7702, San Francisco, CA 94120-7702
Phone: (415) 974-2000
Fax: (415) 974-3333
Email:
Web page: http://www.frbsf.org/
More information through EDIRC

Order Information:
Email:
Web: http://www.frbsf.org/popups/fiporder.html

For technical questions regarding this item, or to correct its listing, contact: (Diane Rosenberger).

Related research
Keywords: Banking Act of 1933 Investment banking Nonbank activities Banks and banking

Other versions of this item:

This paper has been announced in the following NEP Reports: 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. 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!]
  2. Philippe Jorion, 2005. "Bank Trading Risk and Systemic Risk," NBER Working Papers 11037, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Victoria Geyfman, 2005. "Risk-adjusted performance measures at bank holding companies with section 20 subsidiaries," Working Papers 05-26, Federal Reserve Bank of Philadelphia. [Downloadable!]
  4. George Alessandria & Horag Choi, 2005. "Do sunk costs of exporting matter for net export dynamics?," Working Papers 05-20, Federal Reserve Bank of Philadelphia. [Downloadable!]
    Other versions:
  5. Victoria Geyfman, 2005. "Banks in the securities business: market-based risk implications of section 20 subsidiaries," Working Papers 05-17, Federal Reserve Bank of Philadelphia. [Downloadable!]
  6. 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.
  7. Alan K. Reichert & Larry D. Wall, 2000. "The potential for portfolio diversification in financial services," Economic Review, Federal Reserve Bank of Atlanta, issue Q3, pages 35-52. [Downloadable!]
  8. Rosie Smith & Christos Staikouras & Geoffrey Wood, . "Non-interest income and total income stability," Bank of England working papers 198, Bank of England. [Downloadable!]
  9. Allen N. Berger, 2000. "The integration of the financial services industry: where are the efficiencies?," Finance and Economics Discussion Series 2000-36, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  10. Simon H. Kwan & Elizabeth S. Laderman, 1999. "On the portfolio effects of financial convergence - a review of the literature," Economic Review, Federal Reserve Bank of San Francisco, pages 18-31. [Downloadable!]
Statistics
Access and download statistics

Did you know? IDEAS also covers the most complete directory of Economics departments and institutes, EDIRC.

This page was last updated on 2008-8-11.


This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.