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The Effects of Loan Portfolio Concentration on Brazilian Banks' Return and Risk

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

This paper tests whether diversification of the credit portfolio at the bank level is associated to better performance and lower risk. We employ a new high frequency (monthly) panel data constructed 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; there are significant size effects; foreign and public 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, especially after the failure of Lehman Brothers.

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File URL: http://www.bcb.gov.br/pec/wps/ingl/wps215.pdf
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Paper provided by Central Bank of Brazil, Research Department in its series Working Papers Series with number 215.

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Date of creation: Oct 2010
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Handle: RePEc:bcb:wpaper:215
Contact details of provider: Web page: http://www.bcb.gov.br/?english

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