The relationship between organizational form and performance: the case of foreign securities subsidiaries of U.S. banking organizations

Gary Whalen

Proceedings, 1998, issue Sep

Abstract: Debate about the effects of permitting U.S. commercial banks to expand their range of activities has intensified in recent years. Some observers worry that banks with access to a federal safety net have strong incentives to use new opportunities to take greater risks and increase their likelihood of failure at possible cost to the FDIC and taxpayers. Others fear that the safety net might give banks a competitive advantage relative to nonbank rivals. A key element of this debate is whether a holding company structure does a significantly better job of mitigating these potential problems than does a bank subsidiary alternative and should be made mandatory for banking organizations that want to engage in nontraditional activities. Unfortunately, hard, current empirical evidence on the benefits and costs of alternative structures is generally lacking. ; The purpose of this paper is to provide this sort of evidence. In this study, annual financial data for the 1987-1997 period for an unbalanced panel of foreign securities subsidiaries of U.S. banking organizations are used to investigate whether or not significant differences in risk, funding costs and efficiency are related to observed differences in organizational form. This sort of study is possible because U.S. banking organizations have greater freedom to structure their overseas subsidiaries and have done so. They have engaged in securities activities through holding company subsidiaries, as well as both direct and indirect bank subsidiaries. They also are required to file separate financial report on each of these subs. ; Univariate and multivariate statistical techniques are used to determine whether or not significant differences in key measures of performance exist and are related to differences in organizational form. In brief, the empirical results do not support the position of the holding company proponents. Specifically, the evidence does not indicate that bank-owned securities subsidiaries tend to be more risky than holding company securities subsidiaries. Bank securities subsidiaries also do not appear to enjoy any funding advantage relative to holding company subs. These two results are particularly noteworthy because Section 23A and 23B restrictions on intracompany funding do not currently apply to transactions between banks and their direct and indirect bank subsidiaries. Finally, there is some evidence that bank subs are more efficient.

Keywords: Securities; Risk; Bank investments (search for similar items in EconPapers)
Date: 1998
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