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This paper develops a new measure of the risk to profitability inherent in a bank's loan portfolio, based on traditional portfolio theory. It then uses this measure to examine the risk levels in the loan portfolios of merging Bank Holding Companies (BHCs) and the changes in risk that occur in the years after the merger. The paper finds that merging BHCs have higher than average levels of charge-offs and higher than average risk in their portfolios in the year before the merger. It also finds that the BHCs increase the level of risk after the merger, shifting their loan mix to types with potentially higher returns and higher risks.
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