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Diversification, size, and risk at bank holding companies

  • Rebecca S. Demsetz
  • Philip E. Strahan
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    This paper shows that large BHCs are better diversified than small BHCs based on market measures of diversification. We find, however, that better diversification does not translate into reductions in overall risk. The risk reducing potential of diversification at large BHCs is offset by their lower capital ratios, larger C&I loan portfolios, and greater use of derivatives. Our results suggest that asset growth should enhance diversification but that the effects on risk will depend on the extent to which growth is accompanied by changes in portfolio attributes. Using data from 1980 to 1993, we find that BHC asset growth has, in fact, been accompanied by economically important reductions in risk.

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    File URL: http://www.newyorkfed.org/research/staff_reports/research_papers/9506.html
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    File URL: http://www.newyorkfed.org/research/staff_reports/research_papers/9506.pdf
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    Paper provided by Federal Reserve Bank of New York in its series Research Paper with number 9506.

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    Date of creation: 1995
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    Handle: RePEc:fip:fednrp:9506
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    1. Mark E. Levonian, 1994. "Interstate banking and risk," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue jul22.
    2. Yakov Amihud & Baruch Lev, 1981. "Risk Reduction as a Managerial Motive for Conglomerate Mergers," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 605-617, Autumn.
    3. Edward J. Kane & Haluk Unal, 1988. "Change in Market Assessments of Deposit-Institution Riskiness," NBER Working Papers 2530, National Bureau of Economic Research, Inc.
    4. John H. Boyd & Mark Gertler, 1994. "Are banks dead? or, are the reports greatly exaggerated?," Proceedings 25, Federal Reserve Bank of Chicago.
    5. Heston, Steven L. & Rouwenhorst, K. Geert, 1994. "Does industrial structure explain the benefits of international diversification?," Journal of Financial Economics, Elsevier, vol. 36(1), pages 3-27, August.
    6. Katherine A. Samolyk, 1994. "U.S. banking sector trends: assessing disparities in industry performance," Economic Review, Federal Reserve Bank of Cleveland, issue Q II, pages 2-17.
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