The Risk Premium for Minority Banks Altruistic Portfolios in Underserved Communities
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
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
Date posted: September 16, 2012 ; Last revised: October 17, 2013
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