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Does Diversification Protect Bank Lending Against Uncertainty?

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  • Van Dan Dang
  • Hoang Chung Nguyen

Abstract

The paper examines whether bank diversification in multiple dimensions can protect bank lending from uncertainty shocks. We use a panel of Vietnamese commercial banks during 2007 – 2019 for empirical analysis and measure uncertainty in banking by the dispersion of bank-level shocks. Our results confirm that banks may reduce loan growth and experience more credit risk amid greater uncertainty. These adverse impacts of uncertainty on bank lending (both quantity and quality) are significantly alleviated by bank diversification in the loan portfolio, income, and funding aspects. Our findings offer practical implications for regulators and banks themselves: bank diversification can effectively act as a lending shock absorber in periods of high uncertainty.

Suggested Citation

  • Van Dan Dang & Hoang Chung Nguyen, 2022. "Does Diversification Protect Bank Lending Against Uncertainty?," Credit and Capital Markets – Kredit und Kapital, Duncker & Humblot, Berlin, vol. 55(3), pages 349-379.
    • Handle: RePEc:dah:aeqccm:v55_y2022_i3_q3_p349-379
    DOI: 10.3790/ccm.55.3.349
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    More about this item

    Keywords

    Bank lending; Credit risk; Diversification; Uncertainty;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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