Author : Kathy M. Estes
Publisher :
ISBN 13 :
Total Pages : 252 pages
Book Rating : 4.:/5 (958 download)
Book Synopsis A Study of the Impact of Geographic, Activity, and Asset Diversification on Community Bank Risk-adjusted Performance During the Financial Crisis by : Kathy M. Estes
Download or read book A Study of the Impact of Geographic, Activity, and Asset Diversification on Community Bank Risk-adjusted Performance During the Financial Crisis written by Kathy M. Estes and published by . This book was released on 2014 with total page 252 pages. Available in PDF, EPUB and Kindle. Book excerpt: Many U.S. commercial banks failed or experienced weak or negative earnings during the recent financial crisis. The most costly failures from 2007 through 2011 were those in institutions greater than $1 billion in total assets; however, the majority of bank failures (about 85%) were of institutions less than $1 billion. These represent community banks that are instrumental in small business lending and employment growth. Community banks face different risks and performance challenges than their largest counterparts, including the inability to achieve economies of scale and scope enjoyed by the largest institutions and exclusion from "too-big-to-fail" status. The unique challenges facing these institutions, coupled with the large number of recent failures, motivate research into the potential strategies these bank managers can use to improve risk-adjusted performance. This research purposed to study the relationship between three potential diversification strategies and their impact on community bank risk-adjusted performance during the recent financial crisis. Understanding these relationships could improve management's decision-making, allowing them to choose strategies that potentially mitigate their risk during a severe economic downturn. Using financial and deposit data available from industry regulators, Herfindahl-Hirschman Indexes (HHIs) were calculated as proxies for geographic, activity, and asset diversification. Multiple linear regression models for each of five years (2007-2011) were used to consider the impact of the diversification variables, as well as several control variables, on risk-adjusted return on assets. The results show that greater diversification in all three areas has a positive relationship with performance; however, only the asset diversification relationship is significant. These results show that, to the extent possible for community banks, greater diversification can improve risk-adjusted performance.