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Banks in the securities business: market-based risk implications of section 20 subsidiaries

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  • Victoria Geyfman

Abstract

This paper explores whether there was an economically significant differential in market-based risk between bank holding companies (BHCs) with Section 20 subsidiaries – subsidiaries that were authorized by the Federal Reserve to conduct bank-ineligible securities activities – and BHCs without such subsidiaries. Using market returns over a period of time in which BHCs expanded into securities activities, from 1985 through 1999, this study finds evidence that BHCs that participated in investment banking exhibited significantly lower total and unsystematic risk, suggesting that banks’ participation in the securities business resulted in diversification gains. However, BHCs with Section 20 subsidiaries exhibited higher systematic risk.

Suggested Citation

  • Victoria Geyfman, 2005. "Banks in the securities business: market-based risk implications of section 20 subsidiaries," Working Papers 05-17, Federal Reserve Bank of Philadelphia.
  • Handle: RePEc:fip:fedpwp:05-17
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    File URL: http://www.philadelphiafed.org/research-and-data/publications/working-papers//2005/wp05-17.pdf
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    References listed on IDEAS

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    1. Rebecca Demsetz & Philip E. Strahan, 1995. "Historical patterns and recent changes in the relationship between bank holding company size and risk," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 13-26.
    2. Linda Allen & Julapa Jagtiani, 1997. "Risk and Market Segmentation in Financial Intermediaries' Returns," Journal of Financial Services Research, Springer;Western Finance Association, vol. 12(2), pages 159-173, October.
    3. John H. Boyd & Stanley L. Graham, 1988. "The profitability and risk effects of allowing bank holding companies to merge with other financial firms: a simulation study," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 3-20.
    4. Simon Kwan, 1998. "Securities activities by commercial banking firms' Section 20 subsidiaries: risk, return and diversification benefits," Working Papers in Applied Economic Theory 98-10, Federal Reserve Bank of San Francisco.
    5. Marcia Millon Cornett & Evren Ors & Hassan Tehranian, 2002. "Bank Performance around the Introduction of a Section 20 Subsidiary," Journal of Finance, American Finance Association, vol. 57(1), pages 501-521, February.
    6. Robert B. Avery & Allen N. Berger, 1988. "Risk-based capital and off-balance sheet activities," Finance and Economics Discussion Series 35, Board of Governors of the Federal Reserve System (U.S.).
    7. João Santos, 1998. "Commercial Banks in the Securities Business: A Review," Journal of Financial Services Research, Springer;Western Finance Association, vol. 14(1), pages 35-60, July.
    8. Shanken, Jay, 1987. "Multivariate proxies and asset pricing relations : Living with the Roll critique," Journal of Financial Economics, Elsevier, vol. 18(1), pages 91-110, March.
    9. Kwan, Simon H. & Eisenbeis, Robert A., 1995. "An analysis of inefficiencies in banking," Journal of Banking & Finance, Elsevier, vol. 19(3-4), pages 733-734, June.
    10. Bhargava, Rahul & Fraser, Donald R., 1998. "On the wealth and risk effects of commercial bank expansion into securities underwriting: An analysis of Section 20 subsidiaries1," Journal of Banking & Finance, Elsevier, vol. 22(4), pages 447-465, May.
    11. Black, Fischer, 1972. "Capital Market Equilibrium with Restricted Borrowing," The Journal of Business, University of Chicago Press, vol. 45(3), pages 444-455, July.
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    Cited by:

    1. Demirgüç-Kunt, Asli & Huizinga, Harry, 2010. "Bank activity and funding strategies: The impact on risk and returns," Journal of Financial Economics, Elsevier, vol. 98(3), pages 626-650, December.
    2. Goddard, John & McKillop, Donal & Wilson, John O.S., 2008. "The diversification and financial performance of US credit unions," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1836-1849, September.
    3. Chernobai, Anna & Ozdagli, Ali K. & Wang, Jianlin, 2016. "Business complexity and risk management: evidence from operational risk events in U. S. bank holding companies," Working Papers 16-16, Federal Reserve Bank of Boston.

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    Keywords

    Securities ; Risk ; Bank holding companies;

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