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Banks with something to lose: the disciplinary role of franchise value

Listed author(s):
  • Rebecca Demsetz
  • Marc R. Saidenberg
  • Philip E. Strahan
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    As protectors of the safety and soundness of the banking system, banking supervisors are responsible for keeping banks' risk taking in check. The authors explain that franchise value--the present value of the stream of profits that a firm is expected to earn as a going concern--makes the supervisor's job easier by reducing banks' incentives to take risks. The authors explore the relationship between franchise value and risk taking from 1986 to 1994 using both balance-sheet data and stock returns. They find that banks with high franchise value operate more safely than those with low franchise value. In particular, high-franchise-value banks hold more capital and take on less portfolio risk, primarily by diversifying their lending activities.

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    Article provided by Federal Reserve Bank of New York in its journal Economic Policy Review.

    Volume (Year): (1996)
    Issue (Month): Oct ()
    Pages: 1-14

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    Handle: RePEc:fip:fednep:y:1996:i:oct:p:1-14:n:v.2no.2
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