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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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    References listed on IDEAS

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    1. 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.
    2. Simon H. 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.
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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. Chernobai, Anna & Ozdagli, Ali & Wang, Jianlin, 2021. "Business complexity and risk management: Evidence from operational risk events in U.S. bank holding companies," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 418-440.
    3. 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.

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    Keywords

    Securities; Risk; Bank holding companies;
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