Diversification, Organization, and Efficiency: Evidence from Bank Holding Companies
AbstractWe use a portfolio-simulation technique to estimate the value added from diversification by bank holding companies. Using a sample of 412 multi-bank bank holding companies (MBHCs) from 1990 to 1994, we construct pro forma benchmark portfolios for each MBHC composed of shares of single banks, weighted to correspond to the MBHC's distribution of activities. We then compare the performance and characteristics of the MBHCs to that of their pro forma benchmarks. Diversification through the holding company structure does appear to bring certain benefits: the MBHCs hold less capital and engage in more lending, on average, then their pro forma benchmarks. However, these desirable characteristics do not translate into higher profits, implying some organizational inefficiencies inherent in the holding company structure. This suggests that banks should be allowed to realize the benefits of diversification without limiting them to a particular organizational form.
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Bibliographic InfoPaper provided by Wharton School Center for Financial Institutions, University of Pennsylvania in its series Center for Financial Institutions Working Papers with number 97-27.
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Find related papers by JEL classification:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
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