Journal of BANKING & ELSEVIER FINANCE Journal of Banking & Finance 20 (1996) 1775-1791 Commercial bank mutual fund activities" Implications for bank risk and profitability John G. Gallo a, Vincent P. Apilado b,,, James W. Kolari c a Department of Managerial Sciences, University ofNet'ada, Reno, NV 89557. USA b Department of Finance and Real Estate, UniL, ersity of Texas at Arlington, Arlington, TX 76019, USA c Department of Finance, Texas A and M University,, College Station, TX 77843, USA Received 4 May 1995; accepted 18 April 1996 Abstract This paper examines the risk structure of bank holding companies and the effect of mutual fund activities on bank risk and profitability over the period 1987-1994. Findings from structural change tests indicate a significant decline in bank risk occurred near the mid-point of the study. Results from a confirmatory factor analytic model employed to examine the impact of mutual fund activities on banks suggest that mutual fund activities moderated bank industry systematic risk during the sample period. Mutual fund activities also increased the profitability of banks. These results suggest that mutual funds represent a productive avenue of expansion for bank holding companies. JEL classification: G2; G21; G23 Keywords: Commercial banking; Bank holding companies; Mutual fund activities; Bank risk; Bank profit 1. Introduction Declining interest rate levels in the late 1980s and early 1990s prompted a shift in household savings patterns. Household savings in the form of bank deposit * Corresponding author. Tel.: ( + 1) 817-273.3840; fax: ( + 1) 817-273.2252; e-mail: apilado@uta.edu. 0378-4266/96/$15.00 Copyright © 1996 Elsevier Science B.V. All rights reserved. PII S03 7 8-4266(96)00024-6