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Bank Holding Company Diversification and the Risk of Capital Impairment

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  • David R. Meinster
  • Rodney D. Johnson

Abstract

The 1970 Amendments to the Bank Holding Company Act have empowered the Federal Reserve Board to determine whether the bank holding company expansions into nonbank activities meet the "proper incident" test. This paper presents an analytical device whereby regulators applying this test can evaluate the effects that each proposed nonbank expansion has upon the holding company's probability of capital impairment and debt capacity. Several regulatory implications are derived. The procedure is simulated and the separate effects of diversification and debt financing are measured. While the holding companies studied diversified effectively, the benefits were largely thwarted by considerable debt financing.

Suggested Citation

  • 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.
    • Handle: RePEc:rje:bellje:v:10:y:1979:i:autumn:p:683-694
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    Cited by:

    1. Charles Calomiris, 1995. "The Costs of Rejecting Universal Banking: American Finance in the German Mirror, 1870-1914," NBER Chapters, in: Coordination and Information: Historical Perspectives on the Organization of Enterprise, pages 257-322, National Bureau of Economic Research, Inc.
    2. 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.
    3. Randall Pozdena, 1988. "Banks affiliated with bank holding companies: a new look at their performance," Economic Review, Federal Reserve Bank of San Francisco, issue Fall, pages 29-40.
    4. Ben R. Craig & João A. C. Santos, 1997. "The risk effects of bank acquisitions," Economic Review, Federal Reserve Bank of Cleveland, issue Q II, pages 25-35.
    5. Nadia Bensaci, 2008. "L’analyse de la banque selon le paradigme de la finance et l’examen du modèle de banque universelle en France," Revue d'Économie Financière, Programme National Persée, vol. 91(1), pages 127-142.

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