Do Banks Have an Edge?

55 Pages Posted: 3 Jan 2018 Last revised: 12 Nov 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: October 25, 2019

Abstract

Overall, no! We show that the level and time series variation in cash flows for most bank activities are well matched by capital market portfolios with similar interest rate and credit risk to what banks report to hold. Ignoring operating expenses, bank loans earn high returns and transaction deposits pay low interest rates, consistent with these activities having a potential edge. The edge among these activities is insufficient to cover the large operating expenses of banks. A large portion of the aggregate US banking sector closely resembles a tax inefficient passive mutual fund. The residual risks of bank activities, presumably generated by the unique components of the bank business model, generate systematic risks that are uncompensated.

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? (October 25, 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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