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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
Stable URL: http://www.jstor.org/stable/3003359
Page Count: 12
You can always find the topics here!Topics: Portfolio diversification, Cash flow, Subsidiary companies, Bank holding companies, Capital impairment, Debt capacity, Cash, Investment risk, Debt service, Debt financing
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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.
The Bell Journal of Economics © 1979 RAND Corporation