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Risk overhang and loan portfolio decisions

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  • Robert DeYoung
  • Anne Gron
  • Andrew Winton

Abstract

Despite operating under substantial regulatory constraints, we find that commercial banks manage their investments largely consistent with the predictions of portfolio choice models with capital market imperfections. Based on 1990-2002 data for small (assets less than $1 billion) U.S. commercial banks, net new lending to the business, real estate, and consumer sectors increased with expected sector profitability, tended to decrease with the illiquidity of existing (overhanging) loan stocks, and was responsive to correlations in cross-sector returns. Small banks are most appropriate for this study, because they make illiquid loans and manage risk via on-balance sheet (non-hedged) diversification strategies.

Suggested Citation

  • Robert DeYoung & Anne Gron & Andrew Winton, 2005. "Risk overhang and loan portfolio decisions," Working Paper Series WP-05-04, Federal Reserve Bank of Chicago.
    • Handle: RePEc:fip:fedhwp:wp-05-04
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    Cited by:

    1. Ramos-Tallada, Julio, 2015. "Bank risks, monetary shocks and the credit channel in Brazil: Identification and evidence from panel data," Journal of International Money and Finance, Elsevier, vol. 55(C), pages 135-161.
    2. Chmielewski, Tomasz, 2005. "Bank risks, risk preferences and lending," MPRA Paper 5131, University Library of Munich, Germany, revised 15 Jan 2006.

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    Portfolio management; Investment banking;

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