Risk overhang and loan portfolio decisions

Robert DeYoung, Anne Gron and Andrew Winton

No WP-05-04, Working Paper Series from Federal Reserve Bank of Chicago

Abstract: Despite operating under substantial regulatory constraints, we find that commercial banks manage their investments largely consistent with the predictions of portfolio choice models with capital market imperfections. Based on 1990-2002 data for small (assets less than $1 billion) U.S. commercial banks, net new lending to the business, real estate, and consumer sectors increased with expected sector profitability, tended to decrease with the illiquidity of existing (overhanging) loan stocks, and was responsive to correlations in cross-sector returns. Small banks are most appropriate for this study, because they make illiquid loans and manage risk via on-balance sheet (non-hedged) diversification strategies.

Keywords: Portfolio management; Investment banking (search for similar items in EconPapers)
Date: 2005
New Economics Papers: this item is included in nep-fmk
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Citations: View citations in EconPapers (3)

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