Publications
Publications
- 2019
- HBS Working Paper Series
Do Banks Have an Edge?
By: Juliane Begenau and Erik Stafford
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.)