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The effects of loan portfolio concentration on Brazilian banks' return and risk

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Author Info

  • Tabak, Benjamin M.
  • Fazio, Dimas M.
  • Cajueiro, Daniel O.

Abstract

This paper tests whether diversification of the credit portfolio at the bank level leads to better performance and lower risk. We employ a new high frequency (monthly) panel data for the Brazilian banking system with information at the bank level for loans by economic sector. We find that loan portfolio concentration increases returns and also reduces default risk; the impact of concentration on bank's return is decreasing on bank's risk; there are significant size effects; foreign and state-owned banks seem to be less affected by the degree of diversification. An important additional finding is that there is an increasing concentration trend after the breakout of the recent international financial crisis, specially after the failure of Lehman Brothers.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 35 (2011)
Issue (Month): 11 (November)
Pages: 3065-3076

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Handle: RePEc:eee:jbfina:v:35:y:2011:i:11:p:3065-3076

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Web page: http://www.elsevier.com/locate/jbf

Related research

Keywords: Loan portfolio composition Focus Diversification Bank return Bank risk Emerging markets;

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References

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Citations

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Cited by:
  1. Tabak, Benjamin M. & Fazio, Dimas M. & Cajueiro, Daniel O., 2013. "Systemically important banks and financial stability: The case of Latin America," Journal of Banking & Finance, Elsevier, vol. 37(10), pages 3855-3866.
  2. Tabak, Benjamin M. & Takami, Marcelo & Rocha, Jadson M.C. & Cajueiro, Daniel O. & Souza, Sergio R.S., 2014. "Directed clustering coefficient as a measure of systemic risk in complex banking networks," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 394(C), pages 211-216.
  3. Benjamin Miranda Tabak & Guilherme Maia Rodrigues Gomes & Maurício da Silva Medeiros Júnior, 2012. "The Impact of Market Power at Bank Level in Risk-taking: the Brazilian case," Working Papers Series 283, Central Bank of Brazil, Research Department.
  4. Beck, Thorsten & De Jonghe, Olivier, 2013. "Lending concentration, bank performance and systemic risk : exploring cross-country variation," Policy Research Working Paper Series 6604, The World Bank.
  5. Michael Brei & Carlos Winograd, 2012. "Foreign banks, corporate strategy and financial stability: lessons from the river plate," Working Papers halshs-00703738, HAL.
  6. Michael Brei & Carlos Winograd, 2012. "Foreign banks, corporate strategy and financial stability: lessons from the river plate," PSE Working Papers halshs-00703738, HAL.
  7. Benjamin Tabak & Daniel Cajueiro & Dimas Fazio, 2013. "Financial fragility in a general equilibrium model: the Brazilian case," Annals of Finance, Springer, vol. 9(3), pages 519-541, August.
  8. Jahn, Nadya & Memmel, Christoph & Pfingsten, Andreas, 2013. "Banks' concentration versus diversification in the loan portfolio: New evidence from Germany," Discussion Papers 53/2013, Deutsche Bundesbank, Research Centre.
  9. Mircea Epure & Esteban Lafuente, 2012. "Monitoring bank performance in the presence of risk," Economics Working Papers 1310, Department of Economics and Business, Universitat Pompeu Fabra, revised Mar 2014.
  10. Hoxha, Indrit, 2013. "The market structure of the banking sector and financially dependent manufacturing sectors," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 432-444.
  11. de Haan, Jakob & Poghosyan, Tigran, 2012. "Size and earnings volatility of US bank holding companies," Journal of Banking & Finance, Elsevier, vol. 36(11), pages 3008-3016.

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