Economic Policy Review

Historical Patterns and Recent Changes in the Relationship between Bank Holding Company Size and Risk

July 1995Volume 1, Number 2
JEL classification: G21

Authors: Rebecca S. Demsetz and PhilipE.Strahan

What is the relationship between a bank holding company’s size and the risk it takes? The authors find that although the level of risk at large and small bank holding companies has not differed significantly, important distinctions exist in the nature of that risk. Historically, large companies’ diversification advantages were offset by lower capital ratios and the pursuit of risk-enhancing activities. More recently, however, differences between the capital ratios and activities of large and small companies have narrowed. As a result, an inverse relationship between risk and bank holding company size has begun to emerge.

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