Diversification, Size, and Risk at Bank Holding Companies

Abstract

This paper shows that large bank holding companies (BHCs) are better diversified than small BHCs based on market measures of diversification. The authors find, however, that better diversification does not translate into reductions in risk. The risk-reducing potential of diversification at large BHCs is offset by their lower capital ratios and larger commercial and industrial loan portfolios. The authors' results suggest that diversification may provide an important motive for consolidation by allowing BHCs to pursue riskier lending while operating with greater leverage. Copyright 1997 by Ohio State University Press.