Diversification, size, and risk at bank holding companies

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Abstract
This paper shows that large BHCs are better diversified than small BHCs based on market measures of diversification. We find, however, that better diversification does not translate into reductions in overall risk. The risk reducing potential of diversification at large BHCs is offset by their lower capital ratios, larger C&I loan portfolios, and greater use of derivatives. Our results suggest that asset growth should enhance diversification but that the effects on risk will depend on the extent to which growth is accompanied by changes in portfolio attributes. Using data from 1980 to 1993, we find that BHC asset growth has, in fact, been accompanied by economically important reductions in risk.
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