Differences Among Banks are More Important than Their Common Risks in Explaining Banking Profits

26 Pages Posted: 17 Dec 2009

Date Written: December 15, 2009

Abstract

[Regulations following the Financial Crisis threaten to throw out the baby with the bathwater. The Evidence shows that Banks are profitable largely because of their differences. Federally encouraged mergers and other regulations that discourage these differences among banks may reduce the contribution of bank individuality to the financial system. Uniformity increases system risks.

We measure differences among banks using financial statement value differences from sample means. Such differences test as “priced risks,” improving forecasts of financial institution stock returns. We find “differentness” carries greater weight in explaining recent long run financial institution returns than market excess returns within a CAPM framework.

This result has important implications for financial-crisis-induced changes in financial regulation. If differentness is necessary to long run profits in banking, then different capital rules for different sorts of bank are more helpful than rules that encourage uniformity of behavior. Large retail banks and complex wholesale banks should be separate to protect depositors.

Keywords: financial innovation, opacity, value relevance, CAPM

JEL Classification: G2, G12, G14, G15, O32

Suggested Citation

Dew, James Kurt, Differences Among Banks are More Important than Their Common Risks in Explaining Banking Profits (December 15, 2009). Available at SSRN: https://ssrn.com/abstract=1523864 or http://dx.doi.org/10.2139/ssrn.1523864

James Kurt Dew (Contact Author)

Northeastern University ( email )

360 Huntington Ave,
Boston, MA 02115
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
86
Abstract Views
773
Rank
527,956
PlumX Metrics