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The Bigger The Bank The Better The Return

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by Felix Salmon
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Jan 16 2008 12:00am EDT

The Bigger the Bank, the Better the Return

Update: I got this one wrong: see the comments for all the gory detail. Big-bank stocks are riskier than small-bank stocks, which means they go up more than small banks do in up markets, and they go down more than small banks do in down markets. So if you think we're in a down market now, that's all the more reason not to buy Citigroup.

Ryan Stever of the BIS has looked at the returns investors get holding bank stocks over time. And he's come to a fascinating conclusion: bigger is better. Here's his table. He looked at bank returns between 1986 and 2003, and had at least 339 banks in his sample at any given time, with assets ranging from $31 million to $1.26 trillion. He carved the banks up into deciles, and found that the bigger the bank, the higher its "equity beta" - the excess return that holding the stock would give over the risk-free rate.

returns.jpg

Whether this means that now is a good time to buy shares in Citigroup, of course, is another question entirely.

(Via Alea)

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