#97-23
"Risks and Returns in Relationship and Transactional Banks: Evidence from Banks' Returns in Germany, Japan, the U.K., and the U.S."
Abstract: This paper examines the effects of banks' organizational structures on their costs of equity capital. We test whether there is a difference in market risk and default risk exposures between transactional banks, found in the U.S. and U.K., and relationship banks, found in Japan and Germany. We find that the market risk of U.S. banks rises during periods of economic contraction, while the market risk of Japanese banks falls during these periods. (The market risk of U.K. and German banks does not change over the business cycle.) We also find that the returns of only the U.S. and U.K. banks show a significant link to default risk. Both of the results support the idea that relationship banks are more effective monitors than transactional banks.
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