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Bank size, credit and the sources of bank market risk

  • Ryan Stever
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    This study examines bank risk by investigating the equity and loan portfolio characteristics of publicly-traded bank holding companies. Unlike the pattern for non-financial firms, equity betas of large banks are two to five times greater than those of small banks. In explaining this, we note that regulation imposes an effective cap on banks' equity volatility. Because the portfolios of small banks are less diversified, this cap has a greater effect on small banks than large banks. But we reject the hypothesis that small banks lower their equity volatility through lower leverage. Instead, we find that the reduced ability of small banks to diversify forces them to either pick borrowers whose assets have relatively low credit risk or make loans that are backed by relatively more collateral.

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    Paper provided by Bank for International Settlements in its series BIS Working Papers with number 238.

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    Length: 35 pages
    Date of creation: Nov 2007
    Date of revision:
    Handle: RePEc:bis:biswps:238
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    1. Jalal D. Akhavein & Allen N. Berger & David B. Humphrey, 1996. "The Effects of Megamergers on Efficiency and Prices: Evidence from a Bank Profit Function," Center for Financial Institutions Working Papers 96-03, Wharton School Center for Financial Institutions, University of Pennsylvania.
    2. Barry Eichengreen, 1986. "The Political Economy of the Smoot-Hawley Tariff," NBER Working Papers 2001, National Bureau of Economic Research, Inc.
    3. Jose A. Lopez, 2001. "Federal Reserve banks' imputed cost of equity capital," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue aug10.
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