Bank holding company expansion into nonbank functions: is the rise in systematic risk rewarded?

Abstract

This study provides evidence regarding the performance of bank holding companies (BHC) following a series of deregulatory measures by the United States Congress. To compare performance of commercial banks before and after expanding their operations to nonbank functions, a set of hypotheses addressing BHC risk and return characteristics are proposed. Empirical results are mixed. Total risk dropped after expansion. Market risk, on the other hand, rose substantially in post-expansion time. When returns are adjusted for risk, a marginal improvement in performance is achieved.This study determines whether the product and geographical diversification of BHCs into nonbank activities exposed them to a disproportionate amount of business