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The Impact of Off-Balance-Sheet Activities on Banks Returns: An Application of the ARCH-M to Canadian Data

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Author Info
Christian Calmès () (Département des sciences administratives, Université du Québec (Outaouais), et Chaire d'information financière et organisationnelle, ESG-UQAM)
Raymond Théoret () (Département de stratégie des affaires, Université du Québec (Montréal), et Chaire d'information financière et organisationnelle, ESG-UQAM)

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Abstract

This paper revisits the impact of off-balance-sheet (OBS) activities on banks risk-return trade-off. Recent studies (e.g., Stiroh and Rumble 2006) suggest that increasing OBS activities do not necessarily yield straightforward diversification benefits for banks. However, introducing a risk premium in the standard banks returns models, and resorting to an ARCH-M procedure, Canadian data suggest that banks risk-return trade-off displays a structural break around 1997. In the second subperiod of our sample (1997-2007), we find that the noninterest income generated by OBS activities no longer impacts banks returns negatively. While during the first period (1988-1996) the volatility variable is not significant in any returns equations, a risk premium eventually emerged, pricing the risk associated to OBS activities risks.

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File URL: http://www.repad.org/ca/qc/uq/uqo/dsa/cifo2009-07.pdf
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Publisher Info
Paper provided by Département des sciences administratives, UQO in its series RePAd Working Paper Series with number UQO-DSA-wp032009.

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Length: 37 pages
Date of creation: 12 Aug 2009
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Handle: RePEc:pqs:wpaper:032009

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Related research
Keywords: Regulatory changes; Noninterest income; Diversification; Structural break; Risk premium.;

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Find related papers by JEL classification:
G20 - Financial Economics - - Financial Institutions and Services - - - General
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages

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  1. Stiroh, Kevin J. & Rumble, Adrienne, 2006. "The dark side of diversification: The case of US financial holding companies," Journal of Banking & Finance, Elsevier, vol. 30(8), pages 2131-2161, August. [Downloadable!] (restricted)
  2. Calmès, Christian & Liu, Ying, 2009. "Financial structure change and banking income: A Canada-U.S. comparison," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 19(1), pages 128-139, February. [Downloadable!] (restricted)
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  3. Christian Calmès, 2004. "Regulatory Changes and Financial Structure: The Case of Canada," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 140(I), pages 1-35, March. [Downloadable!]
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  4. Rose, Peter S, 1989. "Diversification of the Banking Firm," The Financial Review, Eastern Finance Association, vol. 24(2), pages 251-80, May.
  5. Joshua Coval & Jakub Jurek & Erik Stafford, 2009. "The Economics of Structured Finance," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 3-25, Winter.
  6. Stiroh, Kevin J., 2006. "A Portfolio View of Banking with Interest and Noninterest Activities," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(5), pages 1351-1361, August. [Downloadable!] (restricted)
  7. DeYoung, Robert & Roland, Karin P., 2001. "Product Mix and Earnings Volatility at Commercial Banks: Evidence from a Degree of Total Leverage Model," Journal of Financial Intermediation, Elsevier, vol. 10(1), pages 54-84, January. [Downloadable!] (restricted)
  8. Tobias Adrian & Hyun Song Shin, 2009. "The shadow banking system: implications for financial regulation," Staff Reports 382, Federal Reserve Bank of New York. [Downloadable!]
  9. Demsetz, Rebecca S & Strahan, Philip E, 1997. "Diversification, Size, and Risk at Bank Holding Companies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(3), pages 300-313, August.
  10. Baele, Lieven & De Jonghe, Olivier & Vander Vennet, Rudi, 2007. "Does the stock market value bank diversification?," Journal of Banking & Finance, Elsevier, vol. 31(7), pages 1999-2023, July. [Downloadable!] (restricted)
  11. Jose Manuel Campa & Simi Kedia, 2002. "Explaining the Diversification Discount," Journal of Finance, American Finance Association, vol. 57(4), pages 1731-1762, 08. [Downloadable!] (restricted)
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