Bank Performance Around the Introduction of a Section 20 Subsidiary

Abstract

As of 1987, commercial banks in the United States were allowed to establish Section 20 subsidiaries to conduct investment-banking activities. A concern of regulators was that these activities would result in a decrease in performance of commercial banks relative to the risk being undertaken. This paper examines the performance of commercial banks around the establishment of a Section 20 subsidiary. We find that Section 20 activities undertaken by banks result in increased industry-adjusted operating cash flow return on assets, due mainly to revenues from noncommercial-banking activities. Further, risk measures for the sample banks do not change significantly.