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Causes of the recent increase in bank security holdings

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  • William R. Keeton

Abstract

While bank security holdings have increased sharply in recent years, there is widespread disagreement about the significance of the increase. Some analysts argue that the increase is not a cause for concern because it results from temporary factors such as the business cycle. Others argue that the increase represents a permanent shift in bank portfolio preferences from loans to securities, which could cause banks to look more like mutual funds. If the latter view is true, small firms that rely on banks for credit may be unable to fund new investment. Moreover, monetary policy may be less able to influence total spending in the economy by affecting bank lending.> Keeton seeks to determine how much of the surge in bank security holdings can be explained by temporary factors. He discusses possible explanations for the recent increase in bank security holdings and presents empirical evidence based on the aggregate behavior of bank portfolios over the previous 30 years. He concludes that more than half the increase in security holdings cannot be explained by temporary factors, suggesting that bank portfolio preferences may have permanently changed.

Suggested Citation

  • William R. Keeton, 1994. "Causes of the recent increase in bank security holdings," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 45-57.
  • Handle: RePEc:fip:fedker:y:1994:i:qii:p:45-57:n:v.79no.2
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    File URL: http://www.kansascityfed.org/publicat/econrev/pdf/2q94keet.pdf
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    Cited by:

    1. G. B. Gorton & Ping He, 2008. "Bank Credit Cycles," Review of Economic Studies, Oxford University Press, vol. 75(4), pages 1181-1214.
    2. Michael Devaney & William Weber, 2002. "Small-Business Lending and Profit Efficiency in Commercial Banking," Journal of Financial Services Research, Springer;Western Finance Association, vol. 22(3), pages 225-246, December.
    3. John Wagster, 1999. "The Basle Accord of 1988 and the International Credit Crunch of 1989–1992," Journal of Financial Services Research, Springer;Western Finance Association, vol. 15(2), pages 123-143, March.
    4. Jacques, Kevin T., 2008. "Capital shocks, bank asset allocation, and the revised Basel Accord," Review of Financial Economics, Elsevier, vol. 17(2), pages 79-91.

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    Keywords

    Bank investments ; Banks and banking;

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