Commercial banks’ expanding into securities underwriting: The equity market’s risk assessment

Government officials must decide if the payments system and deposit insurance funds would be endangered by allowing commercial banks to underwrite corporate securities. In this study the authors provide evidence on the issue by evaluating the perspectives of equity investors in investment banking concerns. Dealer exposures to capital markets (investment banking and market making) are not perceived to contribute to their marginal riskiness—either systematic or nonsystematic. However, investment exposures to capital markets (merchant banking and principal transactions) add to both systematic and nonsystematic risks of participating firms. Along with the accounting-based previous research, these findings suggest granting new securities powers that are solely dealer-based.