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Should banks diversify or focus? Know thyself: The role of abilities

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  • Francis, Bill B.
  • Hasan, Iftekhar
  • Küllü, A. Melih
  • Zhou, Mingming

Abstract

The paper investigates whether diversification/focus across assets, industries and borrowers affects bank performance when banks’ abilities (screening and monitoring) are considered. The initial results show that diversification (focus) at the asset, industry and borrower levels is expected to decrease (increase) returns. However, once banks’ screening and monitoring abilities are controlled for, the effect of diversification/focus either gets weaker or disappears. Further, in some cases, these abilities enhance banks’ long-run performance, but in others they prove to be costly, at least, in the short run. Thus, the level of monitoring and screening abilities should be taken into consideration in understanding, planning and implementing diversification/focus strategies.

Suggested Citation

  • Francis, Bill B. & Hasan, Iftekhar & Küllü, A. Melih & Zhou, Mingming, 2018. "Should banks diversify or focus? Know thyself: The role of abilities," Economic Systems, Elsevier, vol. 42(1), pages 106-118.
  • Handle: RePEc:eee:ecosys:v:42:y:2018:i:1:p:106-118
    DOI: 10.1016/j.ecosys.2017.12.001
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    More about this item

    Keywords

    Asset diversification; Industry diversification; Borrower diversification; Monitoring; Screening; Bank performance;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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