OBJECTIVE: This article aims to answer whether increased securitization and/or increased shareholder value pressures at commercial banks have led to higher levels of risk. METHODS: Using data on large U.S. commercial banks from several sources, I estimate linear partial-adjustment models to predict the effects of securitization, as well as CEO incentives to increase shareholder value, on leverage. RESULTS: These models provide evidence that increases in the relative size of trading securities at a commercial bank are significantly associated with increases in leverage. Meanwhile, the relative size of total securities and CEO incentives to increase shareholder value do not appear to affect leverage. CONCLUSION: These findings suggest that limiting commercial bank speculation in securities markets may reduce the likelihood that commercial banks face large losses or become insolvent in financial downturns.
OBJECTIVE: This article aims to answer whether increased securitization and/or increased shareholder value pressures at commercial banks have led to higher levels of risk. METHODS: Using data on large U.S. commercial banks from several sources, I estimate linear partial-adjustment models to predict the effects of securitization, as well as CEO incentives to increase shareholder value, on leverage. RESULTS: These models provide evidence that increases in the relative size of trading securities at a commercial bank are significantly associated with increases in leverage. Meanwhile, the relative size of total securities and CEO incentives to increase shareholder value do not appear to affect leverage. CONCLUSION: These findings suggest that limiting commercial bank speculation in securities markets may reduce the likelihood that commercial banks face large losses or become insolvent in financial downturns.