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Federal Reserve Bank of San Francisco
Working Paper Series
The potential diversification and failure reduction benefits of bank expansion into nonbanking activities
Elizabeth Laderman
Abstract

BHC expansion into nonbank financial activities may increase or decrease the standard deviation of BHC ROA and/or the probability of bankruptcy of the BHC. Using individual firm data and a new application of a simulated merger methodology, I find the standard deviation minimizing and bankruptcy probability minimizing nonbank weights for a variety of nonbanking activities for two time periods, 1979-86 and 1987-97, for all BHCs and for large BHCs. I find that relatively substantial levels of investment in life insurance underwriting are optimal for reducing the standard deviation of BHC ROA. Appreciable levels of investment in life insurance underwriting, casualty insurance underwriting, and securities brokerage are optimal for reducing the probability of bankruptcy of the BHC.


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Elizabeth Laderman, The potential diversification and failure reduction benefits of bank expansion into nonbanking activities, Federal Reserve Bank of San Francisco, Working Paper Series 2000-01, 2000.
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Keywords: Nonbank activities ; Risk ; Financial institutions ; Banking Act of 1933
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