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Credit Risk Management and US Bank-Holding Companies: An Empirical Investigation

Author

Listed:
  • Kudret Topyan

    (O’Malley School of Business, Manhattan College, Bronx, NY 10471, USA)

  • Chia-Jane Wang

    (O’Malley School of Business, Manhattan College, Bronx, NY 10471, USA)

  • Natalia Boliari

    (O’Malley School of Business, Manhattan College, Bronx, NY 10471, USA)

  • Carlos Elias

    (O’Malley School of Business, Manhattan College, Bronx, NY 10471, USA)

Abstract

This paper empirically evaluates the impact of ownership structure on the cost of credit in US banks. It does so by comparing their grouped option-adjusted credit spreads on the outstanding debt issues. As the overall risk of the creditors is reflected in the yield spread of the firms’ outstanding bonds, separately classifying bank-holding companies and stand-alone banks and controlling risk ratings, maturities, and issue sizes enables us to compare the yield spreads tied to ownership structure. After computing the option-adjusted yield spreads of outstanding operating and holding company bonds, we used these values in a master regression equation to test the statistical and economic significance of the binary variable separating the option-adjusted spreads of the two sets. Our work finds that when the S&P ranks and maturities are controlled, US bank-holding companies finances with higher cost of credit compared with stand-alone banks, although holding companies add a layer of liability protection due to the legal separation between the assets and the owners. This suggests that certain characteristics of US bank-holding companies, such as higher leverage and higher systematic risk levels, make them riskier compared with traditional stand-alone banks, offsetting the benefits of forming a holding company.

Suggested Citation

  • Kudret Topyan & Chia-Jane Wang & Natalia Boliari & Carlos Elias, 2024. "Credit Risk Management and US Bank-Holding Companies: An Empirical Investigation," JRFM, MDPI, vol. 17(2), pages 1-11, January.
  • Handle: RePEc:gam:jjrfmx:v:17:y:2024:i:2:p:56-:d:1330612
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    References listed on IDEAS

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    4. Ralph Chami & Thomas F. Cosimano & Jun Ma & Celine Rochon, 2022. "What’s Different about Bank Holding Companies?," JRFM, MDPI, vol. 15(5), pages 1-32, April.
    5. Natalia Boliari & Kudret Topyan, 2022. "Holding Companies and Debt Financing: A Comparative Analysis Using Option-Adjusted Spreads," JRFM, MDPI, vol. 15(12), pages 1-18, December.
    6. Luciano, Elisa & Wihlborg, Clas, 2018. "Financial synergies and systemic risk in the organization of bank affiliates," Journal of Banking & Finance, Elsevier, vol. 88(C), pages 208-224.
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