Risk, regulation, and S&L diversification into nontraditional assets

Risk exposure is a central issue in the debate over allowing savings and loan associations (S&L) to expand into nontraditional activities. The relationship between risk and portfolio composition of 3 distinct groups of S&L lenders based on their investment strategies is examined: 1. real est...

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Bibliographic Details
Published in:Journal of banking & finance 1996-05, Vol.20 (4), p.723-744
Main Authors: Brewer, Elijah III, Jackson, William E, Mondschean, Thomas S
Format: Article
Language:English
Subjects:
Adjustable rate mortgages
Assets
Credit
Diversification
Investment policy
Mortgages
Real estate
Regression analysis
Regulation
Risk
Risk assessment
Risk exposure
Savings
Savings & loan associations
Studies
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Summary:Risk exposure is a central issue in the debate over allowing savings and loan associations (S&L) to expand into nontraditional activities. The relationship between risk and portfolio composition of 3 distinct groups of S&L lenders based on their investment strategies is examined: 1. real estate specialized (RES) S&L lenders with high holdings of adjustable-rate mortgages (ARM), 2. RES S&L lenders with low ARMs, and 3. not real estate specialized (NRES) S&L lenders. The major findings suggest that diversification into nontraditional assets leads to lower risk and higher average returns for RES firms with low ARMs, but for NRES firms it leads to higher and lower average returns. The results strongly suggest that while additional diversification provides risk reduction opportunities for some S&Ls, it also provides opportunities for other S&Ls to increase risk exposure.
ISSN:0378-4266
1872-6372
DOI:10.1016/0378-4266(95)00022-4