The risk effects of combining banking, securities, and insurance activities |
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Authors: | Linda Allen Julapa Jagtiani |
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Institution: | a Professor of Finance, Zicklin School of Business, Baruch College, CUNY, USA(LA);b Senior Financial Economist, Supervision and Regulation, Federal Reserve Bank of Chicago, Chicago, IL,USA(JJ) |
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Abstract: | We create synthetic universal banks to examine the impact of securities and insurance activities on the banking firms’ risk. We find that these nonbank activities reduce the overall risk to the firm but increase systematic market risk—thus reducing the firm’s ability to diversify. Moreover, the unit price of risk does not appear to contain a risk premium to price the enhanced systemic risk exposure that might be engendered by greater convergence across financial firms. Our finding suggests that if there are net gains to universal banking, potential gains from synergies and demand effects must be powerful enough to overcome the disadvantages of increased systemic risk exposure. The results suggest that diversification benefits, when considered in isolation from the other implications of expanded bank powers, are not sufficiently large to justify expanding bank powers into nonbank securities and insurance underwriting activities. |
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Keywords: | Universal banking Non-bank activities Bank holding company’ s risk |
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