Size, Charter Value and Risk in Banking: An International Perspective

Abstract

This paper documents the relationships between bank size and measures of charter value and insolvency risk in a sample of publicly traded banks in 21 industrialized countries for the 1988-1998 period. With the exception of small U.S. bank holding companies, charter values decrease in size and insolvency risk increases in size for most banks in the countries considered. Size-related diversification benefits and/or economies of scale in intermediation are either absent or, if they exist, are more than offset by banks' higher risk taking. Furthermore, banks operating in countries with more developed financial markets exhibit lower insolvency risk, and those operating in countries with either stricter regulation on banks' permissible activities or larger share of bank assets under state ownership exhibit higher insolvency risk. Overall, our evidence is at variance with some broad implications of modern financial intermediation theory, and suggests that absent future structural changes in banking markets of developed countries, bank consolidation is likely to result in an average increase in banks' insolvency risk.