Abstract

http://ssrn.com/abstract=2147347
 


 



The Risk Premium for Minority Banks Altruistic Portfolios in Underserved Communities


Godfrey Cadogan


Ryerson University - Ted Rogers School of Management, Institute for Innovation and Technology Management; University of Cape Town -Research Unit in Behavioural Economics and Neuroeconomics (RUBEN), Faculty of Commerce - School of Economics

October 16, 2013


Abstract:     
Motivated by behavioural asset pricing theory, we extend Vasicek (1977, 2002) factor pricing models to a statistical risk accounting model to characterize the compensating risk premium required to sustain minority banks’ (MBs) altruistic motive to provide credit in underserved communities. Our model predicts that increased bank capitalization, and brokered deposit (BD) exceptions, compensate risk when the incremental internal rate of return they induce is negatively correlated with the internal rate of return on extant MB loan portfolios. Thus implying, paradoxically, that loan portfolios levered by increased capital, and brokered deposits, militate against altruistic motives. This suggests that for a given amount of altruism, minority banks are better served by tactical portfolio allocation in an expanded investment opportunity set. Using Federal Reserve Statistical Release (12/2011) on select FFIEC Form 031 (“Call Report”) data, we fit a risk-return function for minority banks and estimate the compensating risk premium for return on assets.

Number of Pages in PDF File: 44

Keywords: minority banks, behavioral asset pricing, compensating risk premium, brokered deposits, altruistic motives, statistical risk accounting, price of risk

JEL Classification: D03, D81, G11, G12, G21, G28, G32, M48

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Date posted: September 16, 2012 ; Last revised: October 17, 2013

Suggested Citation

Cadogan, Godfrey, The Risk Premium for Minority Banks Altruistic Portfolios in Underserved Communities (October 16, 2013). Available at SSRN: http://ssrn.com/abstract=2147347 or http://dx.doi.org/10.2139/ssrn.2147347

Contact Information

Godfrey Cadogan (Contact Author)
Ryerson University - Ted Rogers School of Management, Institute for Innovation and Technology Management ( email )
575 Bay
Toronto, Ontario M5G 2C5
Canada
University of Cape Town -Research Unit in Behavioural Economics and Neuroeconomics (RUBEN), Faculty of Commerce - School of Economics ( email )
Rondebosch, 7701
South Africa
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