Do Banks Have an Edge?
66 Pages Posted: 3 Jan 2018 Last revised: 13 Jul 2018
Date Written: May 25, 2018
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. Over the period 1960-2016, we find that (1) unlevered bank assets underperform passive portfolios of maturity-matched US Treasury bonds, (2) the cost of bank deposits exceeds the cost of bank debt, (3) bank equities have CAPM betas near one, while passive maturity transformation strategies have CAPM betas near zero, and (4) portfolios of bank equities consistently 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: Suggested Citation