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

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  • Victoria Geyfman
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    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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    Bibliographic Info

    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. Ralph C. Kimball, 1998. "Economic profit and performance measurement in banking," New England Economic Review, Federal Reserve Bank of Boston, Federal Reserve Bank of Boston, issue Jul, pages 35-53.
    2. Gordy, Michael B., 2003. "A risk-factor model foundation for ratings-based bank capital rules," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 12(3), pages 199-232, July.
    3. 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, Federal Reserve Bank of Minneapolis, issue Spr, pages 3-20.
    4. Kwan, Simon H. & Eisenbeis, Robert A., 1995. "An analysis of inefficiencies in banking," Journal of Banking & Finance, Elsevier, Elsevier, vol. 19(3-4), pages 733-734, June.
    5. Kenneth A. Froot & Jeremy C. Stein, 1996. "Risk Management, Capital Budgeting and Capital Structure Policy for Financial Institutions: An Integrated Approach," Center for Financial Institutions Working Papers, Wharton School Center for Financial Institutions, University of Pennsylvania 96-28, Wharton School Center for Financial Institutions, University of Pennsylvania.
    6. Allen N. Berger & Richard J. Herring & Giorgio P. Szegö, 1995. "The Role of Capital in Financial Institutions," Center for Financial Institutions Working Papers, Wharton School Center for Financial Institutions, University of Pennsylvania 95-01, Wharton School Center for Financial Institutions, University of Pennsylvania.
    7. Simon Kwan, 1998. "Securities activities by commercial banking firms' Section 20 subsidiaries: risk, return and diversification benefits," Working Papers in Applied Economic Theory, Federal Reserve Bank of San Francisco 98-10, Federal Reserve Bank of San Francisco.
    8. Santomero, Anthony M & Watson, Ronald D, 1977. "Determining an Optimal Capital Standard for the Banking Industry," Journal of Finance, American Finance Association, American Finance Association, vol. 32(4), pages 1267-82, September.
    9. Cumming, Christine & Hirtle, Beverly, 2001. "The challenges of risk management in diversified financial companies," Journal of Financial Transformation, Capco Institute, Capco Institute, vol. 3, pages 89-95.
    10. Stoughton, Neal & Zechner, Josef, 1999. "Optimal Capital Allocation Using RAROC And EVA," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2344, C.E.P.R. Discussion Papers.
    11. Linda Allen & Julapa Jagtiani, 1997. "Risk and Market Segmentation in Financial Intermediaries' Returns," Journal of Financial Services Research, Springer, Springer, vol. 12(2), pages 159-173, October.
    12. M.J.B. Hall, 1996. "The amendment to the capital accord to incorporate market risk," BNL Quarterly Review, Banca Nazionale del Lavoro, Banca Nazionale del Lavoro, vol. 49(197), pages 271-277.
    13. Darryll Hendricks & Beverly Hirtle, 1997. "Bank capital requirements for market risk: the internal models approach," Economic Policy Review, Federal Reserve Bank of New York, Federal Reserve Bank of New York, issue Dec, pages 1-12.
    14. M.J.B. Hall, 1996. "The amendment to the capital accord to incorporate market risk," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, Banca Nazionale del Lavoro, vol. 49(197), pages 271-277.
    15. Christopher James, 1996. "RAROC Based Capital Budgeting and Performance Evaluation: A Case Study of Bank Capital Allocation," Center for Financial Institutions Working Papers, Wharton School Center for Financial Institutions, University of Pennsylvania 96-40, Wharton School Center for Financial Institutions, University of Pennsylvania.
    16. Craig Furfine, 2001. "Bank Portfolio Allocation: The Impact of Capital Requirements, Regulatory Monitoring, and Economic Conditions," Journal of Financial Services Research, Springer, Springer, vol. 20(1), pages 33-56, September.
    17. Yoram Landskroner & David Ruthenberg & David Zaken, 2005. "Diversification and Performance in Banking: The Israeli Case," Journal of Financial Services Research, Springer, Springer, vol. 27(1), pages 27-49, February.
    18. Berger, Allen N. & Hancock, Diana & Humphrey, David B., 1993. "Bank efficiency derived from the profit function," Journal of Banking & Finance, Elsevier, Elsevier, vol. 17(2-3), pages 317-347, April.
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