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Risk-adjusted performance measures at bank holding companies with section 20 subsidiaries

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Author Info
Victoria Geyfman
Abstract

This paper examines risk-adjusted performance measures in banking, which are used as a guide for efficient asset allocation, performance evaluation, and capital structure decisions in complex, multidivisional financial institutions. Traditional measures of performance are contrasted with the portfolio-based risk-adjusted measures using a unique detailed micro data set for a sample of domestic bank holding companies (BHCs) that engaged in both commercial banking and investment banking activities between 1990 and 1999. This paper finds evidence that traditional stand-alone performance measures can lead to results substantially different from those of the portfolio models. This study also examines BHCs’ optimal portfolios consisting of traditional and nontraditional banking activities derived from the efficient frontiers. These results show that there are gains from diversification as indicated by the composition of optimal portfolios.

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Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 05-26.

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Date of creation: 2005
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Handle: RePEc:fip:fedpwp:05-26

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Keywords: Bank holding companies ; Risk management;

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  1. Froot, Kenneth A. & Stein, Jeremy C., 1998. "Risk management, capital budgeting, and capital structure policy for financial institutions: an integrated approach," Journal of Financial Economics, Elsevier, vol. 47(1), pages 55-82, January. [Downloadable!] (restricted)
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  2. Allen N. Berger & Richard J. Herring & Giorgio P. Szegö, 1995. "The Role of Capital in Financial Institutions," Center for Financial Institutions Working Papers 95-01, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
    Other versions:
  3. 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. [Downloadable!] (restricted)
  4. Christine M. Cumming & Beverly J. Hirtle, 2001. "The challenges of risk management in diversified financial companies," Economic Policy Review, Federal Reserve Bank of New York, issue Mar, pages 1-17. [Downloadable!]
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  5. Berger, Allen N. & Hancock, Diana & Humphrey, David B., 1993. "Bank efficiency derived from the profit function," Journal of Banking & Finance, Elsevier, vol. 17(2-3), pages 317-347, April. [Downloadable!] (restricted)
  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. [Downloadable!]
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  7. Yoram Landskroner & David Ruthenberg & David Zaken, 2005. "Diversification and Performance in Banking: The Israeli Case," Journal of Financial Services Research, Springer, vol. 27(1), pages 27-49, February. [Downloadable!] (restricted)
  8. Stoughton, Neal & Zechner, Josef, 1999. "Optimal Capital Allocation Using RAROC And EVA," CEPR Discussion Papers 2344, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  9. Michael B. Gordy, 2002. "A risk-factor model foundation for ratings-based bank capital rules," Finance and Economics Discussion Series 2002-55, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  10. Christopher James, 1996. "RAROC Based Capital Budgeting and Performance Evaluation: A Case Study of Bank Capital Allocation," Center for Financial Institutions Working Papers 96-40, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
  11. 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. [Downloadable!]
  12. Santomero, Anthony M & Watson, Ronald D, 1977. "Determining an Optimal Capital Standard for the Banking Industry," Journal of Finance, American Finance Association, vol. 32(4), pages 1267-82, September. [Downloadable!] (restricted)
  13. Ralph C. Kimball, 1998. "Economic profit and performance measurement in banking," New England Economic Review, Federal Reserve Bank of Boston, issue Jul, pages 35-53. [Downloadable!]
  14. Linda Allen & Julapa Jagtiani, 1996. "Risk and Market Segmentation in Financial Intermediaries’ Returns," Center for Financial Institutions Working Papers 96-36, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
  15. Darryll Hendricks & Beverly Hirtle, 1997. "Bank capital requirements for market risk: the internal models approach," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 1-12. [Downloadable!]
  16. 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," Proceedings, Federal Reserve Bank of Chicago, pages 476-514.
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