Abstract
Valuable bank charters have been hypothesized to provide bank managers self-regulatory incentives to constrain their risk taking. However, this paper presents evidence that charter value itself may derive from high-risk activities, indicating that minimizing risk taking also would limit the value of the charter. During economic expansions, bank charter values increase to reflect growth opportunities. In turn, high-charter-value banks gain easier access to equity capital sources for expansion. The result is a positive relationship between charter value and capital ratios during expansions. However, this relationship may invert during economic contractions. Panel regressions demonstrate that the charter value and bank leverage relationship is sensitive to market conditions.
Similar content being viewed by others
References
Commercial and Financial Chronicle. New York: William B. Dana Co., various years.
Demsetz, R. S., and P. E. Strahan. “Diversification, Size, and Risk at Bank Holding Companies.” Journal of Money, Credit and Banking 29,no. 3 (August 1997), 300-313.
Demsetz, R. S., M. R. Saidenberg, and P. E. Strahan. “Banks with Something to Lose: The Disciplinary Role of Franchise Value.” Federal Reserve Bank of New York, Economic Policy Review (October 1996).
Hughes, J. P., W. Lang, L. J. Mester, and C. Moon. “Efficient Banking Under Interstate Branching.” Journal of Money, Credit and Banking 28,no. 4, Part 2 (November 1996), 1045-1071.
Ibbotson Associates. Stocks, Bonds, Bills, and Inflation: 1993 Yearbook. Chicago: Ibbotson Associates, 1993.
Jones, C. P., and J. W. Wilson. “Stocks, Bonds, Paper, and Inflation: 1870–1985, a Look at the World Before Ibbotson and Sinquefield.” Journal of Portfolio Management (Fall 1987), 20-24.
Keeley, M. “Deposit Insurance, Risk, and Market Power in Banking.” The American Economic Review 80 (December 1990), 1183-1200.
Li, A., P. Ritchken, L. Sankarasubramanian, and J. B. Thomson. “Regulatory Taxes, Investment and Financing Decisions for Insured Banks.” Working paper, 1995.
Marcus, A. “Deregulation and Bank Financial Policy.” Journal of Banking and Finance 8 (1984), 557-565.
Moody's Manual of Investments. New York: Moody's Investors Service, various years.
Rand McNally Bankers Directory (the Bankers Blue Book). New York: Rand McNally & Company, various years.
Author information
Authors and Affiliations
Rights and permissions
About this article
Cite this article
Saunders, A., Wilson, B. An Analysis of Bank Charter Value and Its Risk-Constraining Incentives. Journal of Financial Services Research 19, 185–195 (2001). https://doi.org/10.1023/A:1011163522271
Issue Date:
DOI: https://doi.org/10.1023/A:1011163522271