Bank Performance around the Introduction of a Section 20 Subsidiary

  • Author(s): Marcia Millon Cornett, Evren Ors, Hassan Tehranian
  • Published: Dec 17, 2002
  • Pages: 501-521
  • DOI: 10.1111/1540-6261.00430

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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