On the margin effects of commercial bank expansion into securities and insurance activities under the same roof: a mathematical swap approach

  • Authors:

  • Jyh-Jiuan Lin;Pai-Chou Huang;Wei-Ming Hung

  • Affiliations:

  • Department of Statistics, Tamkang University, Tamsui,Taipei County, Taiwan;School of Business Administration, Southwestern University of Finance and Economics, Chengdu, Sichuan, P. R. China;Graduate Institute of International Business, Tamkang University, Tamsui, Taipei County, Taiwan

  • Venue:
  • WSEAS Transactions on Circuits and Systems
  • Year:
  • 2010

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Abstract

The Gramm-Leach-Bliley Act (GLBA) of 1999 allows commercial bank expansion into investment banking of securities and insurance activities without limit in subsidiaries separate from commercial banks. This paper demonstrates how securities hedging, insurance underwriting, and capital regulation through the total return swap approach jointly determine the optimal bank interest margin under the same roof. We find that the bank's interest margin and noninterest income are positively related to the bank's securities hedging demand, and to the insurance underwriting provision, but negatively related to the bank capital requirement. We also find that the results of the bank's noninterest income follow a similar argument as in the case of a change in interest margin. The results show that the combined production of commercial banking expansion into investment banking enhances the bank's synergistic gains. In addition, if regulators reduce capital charges, a commercial bank will have a strong incentive to expand its investment banking activities. This suggests obvious diversification benefits from the return to investment banking under the same roof.