We study empirically the effect of focus (specialization) vs. diversification on the return and the risk of banks using data from 105 Italian banks over the period 1993–1999. Specifically, we analyze the tradeoffs between (loan portfolio) focus and diversification using data that is able to identify loan exposures to different industries, and to different sectors, on a bank-by-bank basis. Our r...

We study empirically the effect of focus (specialization) vs. diversification on the return and the risk of banks using data from 105 Italian banks over the period 1993–1999. Specifically, we analyze the tradeoffs between (loan portfolio) focus and diversification using a unique data set that is able to identify individual bank loan exposures to different industries, to different sectors, and t...

In attempting to promote bank stability, the Basel Committee on Banking Supervision (2006) provides a framework that seeks to control the amount of tail risk that large banks take in their trading books. However, banks around the world suffered sizeable trading losses during the recent crisis. Due to the size and prevalence of losses, a formal examination of whether the Basel framework allows b...

The period selected for this study represents one of particular interest with respect to regional bank performance. First, it represents the five-year period immediately following the implementation in 1992 of capital adequacy requirements for banks under the Basel Accord of 1988. The basis of the Accord of 1988 was that a consistent standard be applied for determining minimum capital requireme...

Mergers and Acquisitions in Information Technology (IT) industry have reached record levels in the last decade. Especially in the fast-growing market of IT, more and more companies merge or acquire for the purpose of gaining access to knowledge, skills, and innovation. However, even in a sector that recognizes the importance of knowledge, where smart people are the competitive edge of a company...

We investigate the question of whether sophistication in risk management fosters banking stability. We compare a simple banking system which uses an average rating with a sophisticated banking system in which banks are able to assess the default risk of entrepreneurs individually. Both banking systems compete for deposits, loans, and bank equity. While a sophisticated system rewards entrepreneu...

65 Banks' internal risk management models and their prudential recognition The Basle Market Risk Paper,1 which amended the Basle Capital Accord of 1988, requires internationally operating banks to apply capital charges to their market price risks2 as well as to their counterparty risks as from December 31, 1997. One reason is the sharply growing importance of off-balancesheet business; in Germa...

We argue that a firm’s aggregate risk is a key determinant of whether it manages its future liquidity needs through cash reserves or bank lines of credit. Banks create liquidity for firms by pooling their idiosyncratic risks. As a result, firms with high aggregate risk find it costly to get credit lines from banks, and opt for cash reserves in spite of higher opportunity costs and liquidity pre...

In conjunction with the Committee on the Global Financial System Working Group project on foreign direct investment in emerging market financial sectors, staff of the U.S. Federal Reserve examined the market for political risk insurance (PRI) and its use by financial institutions to mitigate emerging market risks. A series of meetings were undertaken in 2003 with U.S. commercial and investment ...

Capital requirements play a key role in the supervision and regulation of banks. The Basel Committee on Banking Supervision is now changing the current framework by introducing risk-sensitive capital charges. There have been concerns that this will unduly increase volatility in the banks’ capital. Furthermore, when the credit supply is rationed, capital requirements may exacerbate an economic d...