Asset diversification,firm risk,and risk-based capital requirements in banking |
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Authors: | J Nellie Liang Stephen A Rhoades |
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Institution: | 1. Division of Research and Statistics, Federal Reserve Board, Washington, D.C., USA
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Abstract: | The implications of diversification by firms for risk has been raised particularly in connection with conglomerate mergers. This issue is of special interest in banking now because of a recently implemented policy — risk-based capital guidelines. This study presents results of an empirical investigation into the relationship between diversification of a bank's financial assets and indicators of the risk of insolvency. Results indicate that financial asset diversification, as well as geographic diversification, are related to lower risk. |
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