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The Impact of Banking Deregulation on Canadian Banks Returns

  • Christian Calmès

    ()

    (Département des sciences administratives, Université du Québec (Outaouais), et LRSP)

  • Raymond Théoret

    ()

    (Département de stratégie des affaires, Université du Québec (Montréal), et Chaire d'information financière et organisationnelle)

This paper revisits the impact of OBS activities on Canadian banks risk-return trade-off. Recent studies (Stiroh and Rumble 2006, Calmès and Liu 2007) suggest that increasing OBS activities do not necessarily yield straightforward diversification benefits. However, adding a risk premium to earlier accounting returns models by resorting to an ARCH-M procedure, an updated sample reveals that the Canadian banks risk-return trade-off displays a structural break, around 1997. In the second subperiod (1997-2007) of our sample, we find that the share of noninterest income no longer negatively impacts banks returns. Relatedly, we find that a risk premium emerges while, in the first period (1988-1996), the volatility variable is not significant in any returns equations. Our results are thus consistent with a maturation process story.

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File URL: http://www.repad.org/ca/qc/uq/uqam/cifo200901_cls_tht.pdf
File Function: First version, 2009
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Paper provided by Département des sciences administratives, UQO in its series RePAd Working Paper Series with number UQO-DSA-wp022009.

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Length: 38 pages
Date of creation: 12 Jan 2009
Date of revision:
Handle: RePEc:pqs:wpaper:022009
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  1. Mario Quagliariello, 2007. "Macroeconomic uncertainty and banks' lending decisions: The case of Italy," Temi di discussione (Economic working papers) 615, Bank of Italy, Economic Research and International Relations Area.
  2. Stiroh, Kevin J, 2004. "Diversification in Banking: Is Noninterest Income the Answer?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(5), pages 853-82, October.
  3. Stiroh, Kevin J. & Rumble, Adrienne, 2006. "The dark side of diversification: The case of US financial holding companies," Journal of Banking & Finance, Elsevier, vol. 30(8), pages 2131-2161, August.
  4. John H. Boyd & Mark Gertler, 1994. "Are banks dead? Or are the reports greatly exaggerated?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 2-23.
  5. Stiroh, Kevin J., 2006. "A Portfolio View of Banking with Interest and Noninterest Activities," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(5), pages 1351-1361, August.
  6. Rose, Peter S, 1989. "Diversification of the Banking Firm," The Financial Review, Eastern Finance Association, vol. 24(2), pages 251-80, May.
  7. Urban Jermann & Vincenzo Quadrini, 2006. "Financial Innovations and Macroeconomic Volatility," NBER Working Papers 12308, National Bureau of Economic Research, Inc.
  8. Stephen G. Cecchetti, 2008. "Crisis and Responses: the Federal Reserve and the Financial Crisis of 2007-2008," NBER Working Papers 14134, National Bureau of Economic Research, Inc.
  9. Campa, Jose M. & Kedia, Simi, 2000. "Explaining the diversification discount," IESE Research Papers D/424, IESE Business School.
  10. Christian Calmès, 2004. "Regulatory Changes and Financial Structure: The Case of Canada," Working Papers 04-26, Bank of Canada.
  11. Jorge Roldos, 2006. "Disintermediation and Monetary Transmission in Canada," IMF Working Papers 06/84, International Monetary Fund.
  12. Christopher F Baum & Mustafa Caglayan & Neslihan Ozkan, 2004. "The second moments matter: The response of bank lending behavior to macroeconomic uncertainty," Computing in Economics and Finance 2004 172, Society for Computational Economics.
  13. Acharya, Viral V & Hasan, Iftekhar & Saunders, Anthony, 2002. "The Effects of Focus and Diversification on Bank Risk and Return: Evidence from Individual Bank Loan Portfolios," CEPR Discussion Papers 3252, C.E.P.R. Discussion Papers.
  14. Joel F. Houston & Kevin J. Stiroh, 2006. "Three decades of financial sector risk," Staff Reports 248, Federal Reserve Bank of New York.
  15. DeYoung, Robert & Roland, Karin P., 2001. "Product Mix and Earnings Volatility at Commercial Banks: Evidence from a Degree of Total Leverage Model," Journal of Financial Intermediation, Elsevier, vol. 10(1), pages 54-84, January.
  16. Saunders, Anthony & Walter, Ingo, 1994. "Universal Banking in the United States: What Could We Gain? What Could We Lose?," OUP Catalogue, Oxford University Press, number 9780195080698, March.
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