US bank holding companies: Structure of activities and performance through the cycles

The paper proposes a twofold original contribution by addressing the influence of economic conditions and financial markets on specific activities conducted by banks. Based on granular data from a panel of US Bank Holding Companies (BHC), it first aims at estimating profitabilities related to “traditional” banking services and to (customers) investment services conditional to the environment. The study is then extended by the simulation of multiple scenarios to assess the expected performance of activities (profitability and risk) as well as the extent of uncertainty. Diversification into investment services is found to improve the expected risk-return. Also, well calibrated interest rate mismatch (between assets and liabilities) further supports performance. Deviations from historical volatilities and correlations of influential variables may cause diversification benefits to vary. Results however also suggest that the uncertainty of ROE associated with such diversification is limited compared to banking alone.