Risk Management, Capital Structure and Lending at Banks
A. Sinan Cebenoyan
New York University (NYU) - Department of Finance; Hofstra University - Frank G. Zarb School of Business
Philip E. Strahan
Boston College - Department of Finance; National Bureau of Economic Research (NBER)
We test how active management of bank credit risk exposure through the loan sales market affects capital structure, lending, profits, and risk. We find that banks that rebalance their C&I loan portfolio exposures by both buying and selling loans - that is, banks that use the loan sales market for risk management purposes rather than to alter their holdings of loans - hold less capital than other banks; they also make more risky loans (loans to businesses) as a percentage of total assets than other banks. Holding size, leverage and lending activities constant, banks active in the loan sales market have lower risk and higher profits than other banks. We conclude that increasingly sophisticated risk management practices in banking are likely to improve the availability of bank credit but not to reduce bank risk.
Number of Pages in PDF File: 32
Keywords: Risk management, bank lending, capital structure
JEL Classification: G2working papers series
Date posted: December 12, 2001
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