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Are large banks less risky?

Author

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  • Chun-Nan Chen
  • Ming-Yuan Leon Li
  • Yi Chou
  • Li-Ling Chen
  • Wan-Ru Liou

Abstract

This study decomposes the unconditional stock return volatility into two categories: systematic versus idiosyncratic risk, to re-examine the link between size and risk in the banking industry. The feasibility of the model is tested using data for US banks from 1998 to 2007. The evidence uncovered suggests that the practice of size-related diversification obtained with large banks reduces the firm-specific risk, and thus weakens stock return variances. However, rather than eliminating firm-specific risk, it is being transformed into systematic risk. Additionally, our empirical findings can potentially explain why a bank's size-related diversification does not result in a reduction in its unconditional stock return volatility reported in Demsetz and Straha [Historical patterns and recent changes in the relationship between bank size and risk. Federal Reserve Bank of New York Economic Policy Review , 1 (2), 13--26 (1995); Diversification, size, and risk at bank holding companies. Journal of Money, Credit, and Banking , 29 , 300--313 (1997)].

Suggested Citation

  • Chun-Nan Chen & Ming-Yuan Leon Li & Yi Chou & Li-Ling Chen & Wan-Ru Liou, 2010. "Are large banks less risky?," The Service Industries Journal, Taylor & Francis Journals, vol. 31(13), pages 2111-2116, March.
    • Handle: RePEc:taf:servic:v:31:y:2010:i:13:p:2111-2116
    DOI: 10.1080/02642069.2010.503877
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    References listed on IDEAS

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