Banks with Something to Lose: The Disciplinary Role of Franchise Value

14 Pages Posted: 11 Nov 2007

See all articles by Rebecca S. Demsetz

Rebecca S. Demsetz

Data For Decisions LLC

Marc R. Saidenberg

affiliation not provided to SSRN

Philip E. Strahan

Boston College - Department of Finance; National Bureau of Economic Research (NBER)

Date Written: October 1996

Abstract

As protectors of the safety and soundness of the banking system, banking supervisors are responsible for keeping banks' risk taking in check. The authors explain that franchise value - the present value of the stream of profits that a firm is expected to earn as a going concern - makes the supervisor's job easier by reducing banks' incentives to take risks. The authors explore the relationship between franchise value and risk taking from 1986 to 1994 using both balance-sheet data and stock returns. They find that banks with high franchise value operate more safely than those with low franchise value. In particular, high-franchise-value banks hold more capital and take on less portfolio risk, primarily by diversifying their lending activities.

Keywords: franchise value, bank supervision, portfolio risk

JEL Classification: G2, G21, G28

Suggested Citation

Demsetz, Rebecca S. and Saidenberg, Marc R. and Strahan, Philip E., Banks with Something to Lose: The Disciplinary Role of Franchise Value (October 1996). Economic Policy Review, Vol. 2, No. 2, October 1996, Available at SSRN: https://ssrn.com/abstract=1028769 or http://dx.doi.org/10.2139/ssrn.1028769

Rebecca S. Demsetz

Data For Decisions LLC ( email )

11 Winthrop Circle
Weston, MA 02493
United States

Marc R. Saidenberg

affiliation not provided to SSRN

No Address Available

Philip E. Strahan (Contact Author)

Boston College - Department of Finance ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States
617-552-6430 (Phone)
617-552-0431 (Fax)

HOME PAGE: http://www2.bc.edu/~strahan

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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