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Bank Holding Company Diversification and the Risk of Capital Impairment

David R. Meinster and Rodney D. Johnson
The Bell Journal of Economics
Vol. 10, No. 2 (Autumn, 1979), pp. 683-694
Published by: RAND Corporation
DOI: 10.2307/3003359
Stable URL: http://www.jstor.org/stable/3003359
Page Count: 12
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
Bank Holding Company Diversification and the Risk of Capital Impairment
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Abstract

The 1970 Amendments to the Bank Holding Company Act have empowered the Federal Reserve Board to determine whether bank holding company expansions into nonbank activities meet the "proper incident" test. This paper presents an analytical device whereby regulators applying this test can evaluate the effects that each proposed nonbank expansion has upon the holding company's probability of capital impairment and debt capacity. Several regulatory implications are derived. The procedure is simulated and the separate effects of diversification and debt financing are measured. While the holding companies studied diversified effectively, the benefits were largely thwarted by considerable debt financing.

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