Specialization, risk, and capital in banking
Diversification is certainly the simplest and perhaps the oldest approach to managing the trade-off between portfolio risk and return. Because diversification tends to reduce risk without a proportional reduction in returns, an overwhelming majority of commercial banks have diversified portfolios. Larger banks usually are organized into multiple specialized lines of business; smaller banks generally hold a higher proportion of marketable securities whose returns are not tied to a particular geographic market. A much smaller number of banks have chosen to ignore the benefits of diversification and focus on a particular asset such as credit cards, residential or commercial real estate, corporate trust services, or small business lending.> This article investigates specialization in banking and its effects on risk and return. The author compares a group of banks specializing in small business micro-loans (loans under $100,000) with a matched set of diversified peers. The number of specialized banks is still small, but they are expected to become more prevalent, and the number of specialized nonbanks is large, including commercial and consumer finance companies, mortgage banks, leasing companies, many thrift institutions, and some investment banks and insurance companies. The author discusses the issues that specialization creates for regulators, especially in the field of capital requirements, and the need to revise the current approach to regulatory risk-based capital to better distinguish between specialized and diversified banks.
Volume (Year): (1997)
Issue (Month): Nov ()
|Contact details of provider:|| Postal: 600 Atlantic Avenue, Boston, Massachusetts 02210|
Web page: http://www.bos.frb.org/
More information through EDIRC
|Order Information:|| Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Glenn B. Canner & Wayne Passmore, 1997. "The Community Reinvestment Act and the profitability of mortgage-oriented banks," Finance and Economics Discussion Series 1997-7, Board of Governors of the Federal Reserve System (U.S.).
- Timothy H. Hannan & Gerald A. Hanweck, 1986.
"Bank insolvency risk and the market for large certificates of deposit,"
Working Papers in Banking, Finance and Microeconomics
86-1, Board of Governors of the Federal Reserve System (U.S.).
- Hannan, Timothy H & Hanweck, Gerald A, 1988. "Bank Insolvency Risk and the Market for Large Certificates of Deposit," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(2), pages 203-11, May.
- Richard W. Kopcke, 1995. "Financial innovation and standards for the capital of insurance companies," New England Economic Review, Federal Reserve Bank of Boston, issue Jan, pages 29-57.
- Gregory E. Elliehausen & John D. Wolken, 1990.
"Banking markets and the use of financial services by small and medium- sized businesses,"
160, Board of Governors of the Federal Reserve System (U.S.).
- Gregory E. Elliehausen & John D. Wolken, 1990. "Banking markets and the use of financial services by small and medium- sized businesses," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Oct, pages 801-817.
- Maximilian J.B. Hall, 1996. "Banking regulation in the European Union: some issues and concerns," Proceedings 494, Federal Reserve Bank of Chicago.
- Robert C. Merton & André Perold, 1993. "Theory Of Risk Capital In Financial Firms," Journal of Applied Corporate Finance, Morgan Stanley, vol. 6(3), pages 16-32.
- Donald Davis & Kevin Lee, 1997. "A Practical Approach To Capital Structure For Banks," Journal of Applied Corporate Finance, Morgan Stanley, vol. 10(1), pages 33-43.
- Larry D. Wall & Pamela P. Peterson, 1996. "Banks' responses to binding regulatory capital requirements," Economic Review, Federal Reserve Bank of Atlanta, issue Mar, pages 1-17.
- Mark S. Carey & Mitchell A. Post & Steven A. Sharpe, 1996. "Does lending by banks and finance companies differ?," Proceedings 508, Federal Reserve Bank of Chicago.
- J. Nellie Liang & Donald T. Savage, 1990. "New data on the performance of nonbank subsidiaries of bank holding companies," Staff Studies 159, Board of Governors of the Federal Reserve System (U.S.).
- Robert A. Eisenbeis & Myron L. Kwast, 1989. "Are real estate specializing depositories viable? The evidence from commercial banks," Finance and Economics Discussion Series 88, Board of Governors of the Federal Reserve System (U.S.).
- Patrick H. McAllister & Douglas A. McManus, 1992. "Diversification and risk in banking: evidence from ex post returns," Finance and Economics Discussion Series 201, Board of Governors of the Federal Reserve System (U.S.).
When requesting a correction, please mention this item's handle: RePEc:fip:fedbne:y:1997:i:nov:p:51-73. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Catherine Spozio)
If references are entirely missing, you can add them using this form.