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Risk, regulation, and bank holding company expansion into nonbanking

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  • John H. Boyd
  • Stanley L. Graham

Abstract

When banking institutions can expand into other lines of business, some think they will diversify to reduce their total risk. Others think just the opposite. In this article, John H. Boyd and Stanley L. Graham explain the reasoning behind these two views and then test to see which one best describes the behavior of U.S. bank holding companies since 1970. They find that in 1971-77, when these companies were relatively free to invest in some new lines of business, diversification was associated with greater risk of failure. But in 1977-83, when the companies were more tightly regulated, that association disappeared. These findings suggest to Boyd and Graham that, left to their own devices, bank holding companies will expand into new lines of business to increase their risk, but that regulation can control this risk-taking -- at least for the lines of business bank holding companies are currently allowed.

Suggested Citation

  • John H. Boyd & Stanley L. Graham, 1986. "Risk, regulation, and bank holding company expansion into nonbanking," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 10(Spr), pages 2-17.
    • Handle: RePEc:fip:fedmqr:y:1986:i:spr:p:2-17:n:v.10no.2
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    References listed on IDEAS

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    1. Gregory E. Boczar & Stephen A. Rhoades, 1977. "The performance of bank holding company-affiliated finance companies," Staff Studies 90, Board of Governors of the Federal Reserve System (U.S.).
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    5. Merton, Robert C., 1977. "An analytic derivation of the cost of deposit insurance and loan guarantees An application of modern option pricing theory," Journal of Banking & Finance, Elsevier, vol. 1(1), pages 3-11, June.
    6. W. F. Sharpe, 1981. "Bank Capital Adequacy, Deposit Insurance, and Security Values," NBER Chapters, in: Risk and Capital Adequacy in Commercial Banks, pages 187-202, National Bureau of Economic Research, Inc.
    7. Rodney N. Johnson & David R. Meinster, 1974. "Bank Holding Companies: Diversification Opportunities in Nonbank Activities," Eastern Economic Journal, Eastern Economic Association, vol. 1(4), pages 316-323, October.
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    9. David R. Meinster & Rodney D. Johnson, 1979. "Bank Holding Company Diversification and the Risk of Capital Impairment," Bell Journal of Economics, The RAND Corporation, vol. 10(2), pages 683-694, Autumn.
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