Do Banks Have an Edge?

66 Pages Posted: 3 Jan 2018 Last revised: 25 May 2019

See all articles by Juliane Begenau

Juliane Begenau

Stanford University - Graduate School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Erik Stafford

Harvard Business School - Finance Unit

Date Written: May 20, 2019

Abstract

We decompose bank activities into passive and active components and evaluate the performance of the active components of the bank business model by controlling for passive maturity transformation strategies that can be executed in the capital market. We find that (1) unlevered bank assets underperform passive portfolios of maturity-matched US Treasury bonds after paying corporate taxes, (2) the cost advantage of bank deposits has disappeared since 1986, (3) bank equities have CAPM betas near one, while passive maturity transformation strategies have CAPM betas near zero, and (4) portfolios of bank equities underperform portfolios designed to passively mimic their economic exposures. The very strong investment performance of passive maturity transformation strategies over this period may mask the underperformance of the specialized bank activities.

Keywords: Banking, Efficiency, Bank Deposits, Bank Funding Advantage, Leverage, Maturity Transformation, Replicating Portfolio

JEL Classification: G12, G21, G32

Suggested Citation

Begenau, Juliane and Stafford, Erik, Do Banks Have an Edge? (May 20, 2019). Available at SSRN: https://ssrn.com/abstract=3095550 or http://dx.doi.org/10.2139/ssrn.3095550

Juliane Begenau (Contact Author)

Stanford University - Graduate School of Business ( email )

Stanford, CA 94305
United States
6507245661 (Phone)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Erik Stafford

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-8064 (Phone)
617-496-7357 (Fax)

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