The Risk Premium for Minority Banks Altruistic Portfolios in Underserved Communities

44 Pages Posted: 16 Sep 2012 Last revised: 17 Oct 2013

G. Charles-Cadogan

Ryerson University - Ted Rogers School of Management, Institute for Innovation and Technology Management; UCT - School of Economics

Date Written: 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.

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

Suggested Citation

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

G. Charles-Cadogan (Contact Author)

Ryerson University - Ted Rogers School of Management, Institute for Innovation and Technology Management ( email )

575 Bay
Toronto, Ontario M5G 2C5
Canada

UCT - School of Economics ( email )

Rondebosch, 7701
South Africa

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