Bank Performance around the Introduction of a Section 20 Subsidiary

Authors

  • Marcia Millon Cornett,

  • Evren Ors,

  • Hassan Tehranian

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    • Cornett and Ors are from Southern Illinois University at Carbondale and Tehranian is from Boston College. The authors wish to thank Pierluigi Balduzzi, Alan Marcus, René Stulz, and an anonymous referee for their comments. We are also grateful to Elijah Brewer, III, and Susan Yuska for assistance in obtaining Y-9 data and to Karen Rowland, who prepared the manuscript.

ABSTRACT

As of 1987, commercial banks in the United States were allowed to establish Section 20 subsidiaries to conduct investment-banking activities. A concern of regulators was that these activities would result in a decrease in performance of commercial banks relative to the risk being undertaken. This paper examines the performance of commercial banks around the establishment of a Section 20 subsidiary. We find that Section 20 activities undertaken by banks result in increased industry-adjusted operating cash flow return on assets, due mainly to revenues from noncommercial-banking activities. Further, risk measures for the sample banks do not change significantly.

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