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Banks in the securities business: market-based risk implications of section 20 subsidiaries

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  • Victoria Geyfman
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    Abstract

    This paper explores whether there was an economically significant differential in market-based risk between bank holding companies (BHCs) with Section 20 subsidiaries – subsidiaries that were authorized by the Federal Reserve to conduct bank-ineligible securities activities – and BHCs without such subsidiaries. Using market returns over a period of time in which BHCs expanded into securities activities, from 1985 through 1999, this study finds evidence that BHCs that participated in investment banking exhibited significantly lower total and unsystematic risk, suggesting that banks’ participation in the securities business resulted in diversification gains. However, BHCs with Section 20 subsidiaries exhibited higher systematic risk.

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    File URL: http://www.philadelphiafed.org/research-and-data/publications/working-papers//2005/wp05-17.pdf
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    Bibliographic Info

    Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 05-17.

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    Date of creation: 2005
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    Handle: RePEc:fip:fedpwp:05-17

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    Keywords: Securities ; Risk ; Bank holding companies;

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    1. Rebecca S. Demsetz & Philip E. Strahan, 1995. "Historical patterns and recent changes in the relationship between bank holding company size and risk," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 13-26.
    2. João A. C. Santos, 1998. "Commercial banks in the securities business: A review," BIS Working Papers 56, Bank for International Settlements.
    3. Shanken, Jay, 1987. "Multivariate proxies and asset pricing relations : Living with the Roll critique," Journal of Financial Economics, Elsevier, vol. 18(1), pages 91-110, March.
    4. Bhargava, Rahul & Fraser, Donald R., 1998. "On the wealth and risk effects of commercial bank expansion into securities underwriting: An analysis of Section 20 subsidiaries1," Journal of Banking & Finance, Elsevier, vol. 22(4), pages 447-465, May.
    5. Linda Allen & Julapa Jagtiani, 1997. "Risk and Market Segmentation in Financial Intermediaries' Returns," Journal of Financial Services Research, Springer, vol. 12(2), pages 159-173, October.
    6. 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.
    7. Robert B. Avery & Allen N. Berger, 1988. "Risk-based capital and off-balance sheet activities," Finance and Economics Discussion Series 35, Board of Governors of the Federal Reserve System (U.S.).
    8. John H. Boyd & Stanley L. Graham, 1988. "The profitability and risk effects of allowing bank holding companies to merge with other financial firms: a simulation study," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 3-20.
    9. Kwan, Simon H. & Eisenbeis, Robert A., 1995. "An analysis of inefficiencies in banking," Journal of Banking & Finance, Elsevier, vol. 19(3-4), pages 733-734, June.
    10. Black, Fischer, 1972. "Capital Market Equilibrium with Restricted Borrowing," The Journal of Business, University of Chicago Press, vol. 45(3), pages 444-55, July.
    11. Marcia Millon Cornett & Evren Ors & Hassan Tehranian, 2002. "Bank Performance around the Introduction of a Section 20 Subsidiary," Journal of Finance, American Finance Association, vol. 57(1), pages 501-521, 02.
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    Cited by:
    1. Demirgüc-Kunt, A. & Huizinga, H.P., 2009. "Bank Activity and Funding Strategies: The Impact on Risk and Return," Discussion Paper 2009-09, Tilburg University, Center for Economic Research.
    2. Goddard, John & McKillop, Donal & Wilson, John O.S., 2008. "The diversification and financial performance of US credit unions," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1836-1849, September.

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