Diversification, size, and risk at bank holding companies

This paper shows that large bank holding companies (BHCs) are better diversified than small BHCs based on market measures of diversification. We find, however, that better diversification does not translate into reductions in risk. The risk-reducing potential of diversification at large BHCs is offset by their lower capital ratios and larger C&I loan portfolios. Our results suggest that diversification may provide an important motive for consolidation by allowing BHCs to pursue riskier lending while operating with greater leverage.