The Securities Activities of the Foreign Subsidiaries of U.S. Banks: Evidence on Risks and Returns

Abstract: This study provides new evidence of the risks and returns associated with bank involvement in securities activities. This empirical evidence is drawn from an extensive analysis of the performance of the foreign securities subsidiaries of U.S. banking companies over the relatively lengthy 1987-1996 time period. Both industryand firm-level estimates of securities risks and returns from overseas securities activities are constructed from the data since previous studies have found that these two sets of estimates can differ markedly. Systematic differences in performance associated with alternative organizational structures are also investigated because regulations permit structural variety overseas. The results are somewhat sensitive to the aggregation method employed and the precise time period examined. In general, when industry-level data are used, mean securities returns are roughly the same as those earned in domestic banking, while measures of securities risk are modestly higher. When firm-level data are used, mean securities returns typically exceed those of domestic banking by a considerable margin, but the estimates of securities risk are higher, both absolutely and relative to comparable estimates for domestic banking. Both sets of data, as well as a more detailed examination of the performance of individual holding companies, indicate that banking companies can lower their risk by engaging in overseas securities activities. Comparison of the securities returns and risks of direct and indirect bank securities subsidiaries with those of holding company affiliates using industry aggregation revealed some differences in performance. The mean securities returns of the combined bank subsidiary group were slightly above those of the holding company affiliates over some time intervals, and their measured risk was lower in all periods examined. That is, the evidence suggests that permitting U.S. banking organizations to engage in securities activities overseas through direct and indirect bank subsidiaries has not had a significant, deleterious impact on their performance. Although additional research is necessary to establish the definitiveness of these findings, the results presented here are the only tangible empirical evidence on the domestic structural issue currently available. ______________________________________________________________________________ The opinions expressed in this paper are those of the author and do not necessarily represent those of the Office of the Comptroller of the Currency, the Department of the Treasury, or their staffs. The author thanks Larry Mote, Stew Goddin, Kevin Jacques, Jennifer Eccles and Sam Frumkin for their comments and Frank Dwyer for editorial assistance.