Do Banks Have an Edge?

66 Pages Posted: 3 Jan 2018 Last revised: 13 Jul 2018

See all articles by Juliane Begenau

Juliane Begenau

Stanford University - Graduate School of Business; National Bureau of Economic Research (NBER)

Erik Stafford

Harvard Business School - Finance Unit

Date Written: May 25, 2018

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. 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

Begenau, Juliane and Stafford, Erik, Do Banks Have an Edge? (May 25, 2018). 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

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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