Implications of expanding bank powers into securities activities: Section 20 subsidiaries

The goal of this dissertation is to examine the recent experience of Section 20 subsidiaries (subsidiaries that were authorized by the Federal Reserve to conduct bank-ineligible securities activities of bank holding companies, BHC hereafter) and to investigate possible earnings and risk diversification effects on BHCs. This study adds to the research on banks engaging in securities underwriting activities by exploring a unique detailed micro data set for securities affiliates operating in the U.S. from 1990 through 1999. I investigate risk-return characteristics of BHCs that participated in securities underwriting by using various accounting measures, such as stand-alone risk, Z-scores, and Value at Risk (VaR). The study provides new evidence that shows that BHCs with Section 20 affiliates were more diversified and less likely to fail relative to their commercial banking and securities subsidiaries.; Unlike previous studies that examine only total risk, this study also focuses on systematic and unsystematic risk of BHCs that were involved in securities underwriting activities. Market risk was derived from the capital asset pricing model (CAPM) for both holding companies with and without securities affiliates. On the whole, this study finds evidence of significantly lower total risk and unsystematic risk for BHCs with securities underwriting subsidiaries relative to BHCs without such subsidiaries, but higher systematic risk.; To examine the effect of combining commercial banking with investment banking on the banks' safety and soundness, this study examines the capital adequacy of BHCs involved in securities activities. I find that the greater intensity of securities underwriting within the organization is associated with lower capital-to-assets ratios of consolidated BHCs. However, the intensity ratio appears to be positively related to the risk-based capital ratio. That is, Section 20 activities were not associated with lower risk-adjusted capital of the consolidated BHCs.; This study derives and examines risk-adjusted performance measures (RAPM) for BHCs involved in securities underwriting activities. RAPM allows financial institutions to build internal portfolio-based measures of risk that take into consideration the correlation between BHCs' business units. This approach leads to regulatory capital charges that more accurately reflect individual banks' true risk exposures.