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Risk Management, Capital Structure and Lending at Banks

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  • A. Sinan Cebenoyan
  • Philip E. Strahan

Abstract

We test how active management of bank credit risk exposure through the loan sales market affects capital structure, lending, profits, and risk. We find that banks that rebalance their C&I loan portfolio exposures by both buying and selling loans – that is, banks that use the loan sales market for risk management purposes rather than to alter their holdings of loans -- hold less capital than other banks; they also make more risky loans (loans to businesses) as a percentage of total assets than other banks. Holding size, leverage and lending activities constant, banks active in the loan sales market have lower risk and higher profits than other banks. We conclude that increasingly sophisticated risk management practices in banking are likely to improve the availability of bank credit but not to reduce bank risk.

Suggested Citation

  • A. Sinan Cebenoyan & Philip E. Strahan, 2001. "Risk Management, Capital Structure and Lending at Banks," Center for Financial Institutions Working Papers 02-09, Wharton School Center for Financial Institutions, University of Pennsylvania.
  • Handle: RePEc:wop:pennin:02-09
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    References listed on IDEAS

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    3. Mr. Gianni De Nicolo & Philip F. Bartholomew & Ms. Jahanara Zaman & Ms. Mary G Zephirin, 2003. "Bank Consolidation, Internationalization, and Conglomeration: Trends and Implications for Financial Risk," IMF Working Papers 2003/158, International Monetary Fund.
    4. M. Koetter, 2004. "The Stability of Efficiency Rankings when Risk-Preference are Different," Working Papers 04-08, Utrecht School of Economics.

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