Skip to Main Content
HBS Home
  • About
  • Academic Programs
  • Alumni
  • Faculty & Research
  • Baker Library
  • Giving
  • Harvard Business Review
  • Initiatives
  • News
  • Recruit
  • Map / Directions
Faculty & Research
  • Faculty
  • Research
  • Featured Topics
  • Academic Units
  • …→
  • Harvard Business School→
  • Faculty & Research→
Publications
Publications
  • 2019
  • Working Paper
  • HBS Working Paper Series

Do Banks Have an Edge?

By: Juliane Begenau and Erik Stafford
  • Format:Print
  • | Language:English
  • | Pages:57
ShareBar

Abstract

Overall, no! We show that the level and time series variation in cash flows for most bank activities are well matched by capital market portfolios with similar interest rate and credit risk to what banks report to hold. Ignoring operating expenses, bank loans earn high returns and transaction deposits pay low interest rates, consistent with these activities having a potential edge. The edge among these activities is insufficient to cover the large operating expenses of banks. A large portion of the aggregate U.S. banking sector closely resembles a tax inefficient passive mutual fund. The residual risks of bank activities, presumably generated by the unique components of the bank business model, generate systematic risks that are uncompensated.

Keywords

Banks; Market Efficiency; Bank Capital; Bank Debt; CAPM; Banking; Bank Deposits; Bank Funding Advantage; Leverage; Maturity Transformation; Replicating Portfolio; Efficiency; Banks and Banking; Capital Markets; Performance Evaluation; Performance Efficiency; Banking Industry; United States

Citation

Begenau, Juliane, and Erik Stafford. "Do Banks Have an Edge?" Harvard Business School Working Paper, No. 18-060, January 2018. (Revised October 2019.)
  • SSRN
  • Read Now

About The Author

Erik Stafford

Finance
→More Publications

More from the Authors

    • June 2022
    • Faculty Research

    Ocean Carriers (Abridged) Courseware

    By: Erik Stafford
    • March 2022
    • Faculty Research

    Exchanging Salary for Stock Options at a Startup

    By: Erik Stafford
    • January 2022
    • Review of Financial Studies

    Replicating Private Equity with Value Investing, Homemade Leverage, and Hold-to-Maturity Accounting

    By: Erik Stafford
More from the Authors
  • Ocean Carriers (Abridged) Courseware By: Erik Stafford
  • Exchanging Salary for Stock Options at a Startup By: Erik Stafford
  • Replicating Private Equity with Value Investing, Homemade Leverage, and Hold-to-Maturity Accounting By: Erik Stafford
ǁ
Campus Map
Harvard Business School
Soldiers Field
Boston, MA 02163
→Map & Directions
→More Contact Information
  • Make a Gift
  • Site Map
  • Jobs
  • Harvard University
  • Trademarks
  • Policies
  • Accessibility
  • Digital Accessibility
Copyright © President & Fellows of Harvard College